Emerging Trends Real Estate 2011 (1) PWC (Good One)

2011
Emerging
Trends in Real Estate
Emerging Trends in Real Estate 2011

A publication from:
Emerging
Trends in Real Estate
Contents
1 2 5 7 9 10 10 11 12 14 15 18 19 19 22 22 22 23 23 24 26 27 32 39 40 41 44 45 47 49 51 53 54 56 57 59 61 63 65 68 69 70 72 Executive Summary Chapter 1 Entering the Era of Less Muddling Along at Bottom Demand Drag: The Compromised Economy Inflation versus Deflation and Higher Interest Rates Supply Side: Development Stall-Out Regulation and Taxes Real Estate Industry: Chastened and Smaller Best Bets 2011
20 11
Chapter 2 Real Estate Capital Flows More Realistic Banks and Insurers Wall Street CMBSConduits and Special Servicers Mezzanine Debt Opportunity and Core Funds REITs Private REITs, High-Net-Worth Investors, Local Operators Pension Funds Foreign Investors Chapter 3 Markets to Watch No Surprises, Gaps Remain Major Market Review Other Market Prospects Chapter 4 Property Types in Perspective Prospects Improve Apartments Industrial Hotels Office Retail Housing Niche Sectors Chapter 5 Emerging Trends in Canada Investment Prospects Capital in Balance Markets to Watch Property Types in Perspective Best Bets Chapter 6 Emerging Trends in Latin America Brazil: Opportunities and Limits Mexico: Potential and Concerns Interviewees
Editorial Leadership Team

Emerging Trends in Real Estate 2011 Chairs Patrick L. Phillips, Urban Land Institute Mitchell M. Roschelle, PricewaterhouseCoopers Author Jonathan D. Miller Principal Researchers and Advisers Stephen Blank, Urban Land Institute Charles J. DiRocco, Jr., PricewaterhouseCoopers Dean Schwanke, Urban Land Institute Senior Advisers Christopher J. Potter, PricewaterhouseCoopers, Canada Susan M. Smith, PricewaterhouseCoopers Emeritus Emerging Trends Chairs Patrick Leardo Richard Rosan PricewaterhouseCoopers Advisers and Researchers Adam Harvey Allen G. Baker Amedeo Prete Ami J. Patel Amy E. Olson Andrew Alperstein Andrew Popert Anne Daniel Brandon Bush Bruce Raganold Chris Vangou Christine Lattanzio Claude Gilbert Court Maton Dan Crowley Daniel DArchivio David E. Khan David M. Voss Dennis Johnson Dominique Fortier Douglas B. Struckman Frank Magliocco Holly V. Allen Ian Nelson Jaclyn Paul Jag Patel James A. Oswald James Pettigrew Jasen Kwong Jason Palmer Jeff Kiley Jeff Nasser Jennifer A. Murray Katherine Billings Lois McCarron-McGuire Lori-Ann Beausoleil Michael Chung Michael Epstein Nadja Ibrahim Nick Panagiotopoulos Patricia Perruzza Reginald Dean Barnett Rich Fournier Rob E. Sciaudone Russell Goodman Russell Sugar Sandra Blum Scott Williamson Stephen Shulman Susan Johnson Timothy C. Conlon Tori Lambert Yekaterina Kostyuk
Emerging Trends in Real Estate is a trademark of PricewaterhouseCoopers and is registered in the United States and other countries. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisers. October 2010 by the Urban Land Institute and PricewaterhouseCoopers. Printed in the United States of America. All rights reserved. No part of this book may be reproduced in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage and retrieval system, without written permission of the publisher. Recommended bibliographic listing: Urban Land Institute and PricewaterhouseCoopers LLP. Emerging Trends in Real Estate 2011. Washington, D.C.: Urban Land Institute, 2010. ISBN: 978-0-87420-149-9 ULI Catalog Number: E41
ULI Editorial and Production Staff James Mulligan, Managing Editor/Manuscript Editor Betsy Van Buskirk, Creative Director Anne Morgan, Graphic Designer Craig Chapman, Senior Director, Publishing Operations Karrie Underwood, Administrative Coordinator
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Executive Summary
fter three years of dislocation and delaying unprecedented losses, the U.S. real estate industry finally sees some hopeful signs in 2011 of tempered improvementacross all markets and all property sectors. Emerging Trends interviewees expect halting advances in digging out from the recent avalanche of ill-considered commercial property investments and problem loans, but grow concerned about larger economic forces that could stunt any upturn and make the course more treacherous. Its always been a mistake to bet against the U.S. economy, says an interviewee. Just this time its different. We havent gone through a gardenvariety recession, and now were facing a huge deleveraging process, which means a subdued recovery. Worries mount that the nation and its real estate markets enter a disconcerting period of limits and uncertaintyan Era of Less. Among the anticipated factors slowing any rebound: unemployment stays high, wages stagnate, the middle class gets further pinched, lenders and regulators restrict credit, and the tax bite (including local property taxes) increases. The consequences of the nations debt bomb explosion extend well beyond the obvious implications for this next real estate cycle, which include restrained revenue growth and tempered appreciation. The United States may have reached an inflection point where Americans incomes and standard of living come under pressure in the face of intense global competition. While the population grows, individuals curb consumption out of necessity, and increase savings rates to ensure more secure financial futures. As a result, developers realize we wont need as much space on a per-capita basis in the future, and continue on an enforced holiday. Technological advances and corporate outsourcing combine to moderate growth in demand for office space. Distribution advances and e-commerce reduce links in the supply chain between manufacturers and consumers, transforming warehouse needs and dampening tenant demand for bricks-and-mortar retail space. Homeowners slowly will accept that they can
live comfortably and more affordably in smaller houses or apartments and gain economies from driving less. Infill areas and 24-hour neighborhoods in cities and urbanizing suburban nodes become more desirable locations for the large population cohorts of aging, empty-nest baby boomers and their young adult, echo boomer offspring. At the same time, fringe suburban subdivisionslong car rides from work, shopping, and recreation amenitieslose some appeal. A flight to quality by investors accelerates toward the best placestypically coastal gateway cities with traditional 24-hour dynamics further bolstering their investment citadel status. Many interior markets, meanwhile, struggle to attract investor interest; they typically lack direct links to global commerce pathways. More affordable communities face slower growth or worse because the incomes of people who live there may be increasingly compromised. Lenders with strengthening balance sheets finally step up foreclosure activity and dispositions of properties during 2011 and 2012, helping values reset 30 to 50 percent below 2007 peaks. Borrowers should have improved chances to obtain refinancing, if they own relatively well-leased cash-flowing properties. But overleveraged owners dealing with high vacancies and rolling-down rents could face more uncertain prospects in the credit markets, including the increasing likelihood of foreclosure. Investors with cash should have excellent opportunities to seize market-bottom plays by recapitalizing floundering owners and buying foreclosed assets, but they realize that pent-up equity demand for high-quality assets reduces chances for outsized returns. In certain 24-hour coastal markets, frenzied bidding for trophy office space and apartments already raises concern about buyers ignoring the realities of supply/demand fundamentals and conjuring unrealistic growth forecasts. Survey respondents and interviewees ratchet down performance expectations, anticipating high-single-digit returns for core properties and midteen returns for higher-risk investments.
Without ample leverage (and attendant risk), real estate assets cannot sustain higher performance. Washington, D.C., and New York City solidify ratings as the leading U.S. real estate investment markets, followed by San Francisco, Boston, and Seattle. All these metropolitan areas fit the Emerging Trends profile of 24-hour gateways along global pathways, which will continue to attract a large proportion of high-paying, brainpower jobs. Despite somewhat improved outlooks for all surveyed cities, most markets struggle with cash-strapped state and local governments and the prospect of reduced services, including police and fire protection and sanitation. Apartments easily outrank all other property sectors: favorable demographics and the housing bust should increase renter demand, and some interviewees forecast rent spikes by 2012 in some infill markets where development activity has ground to a halt. Readily available financing from Fannie Mae and Freddie Mac bolsters buying activity. Core players also like warehouses and infill grocery-anchored retail, while fullservice center-city hotels remain the top choice for opportunity investors. Suburban office gets the cold shoulder in surveys. Canadas real estate markets largely avoided recessionary impacts, thanks to constrained lending practices and the dominance of conservative institutional owners who hold assets for cash flows. But interviewees remain concerned about lagging outlooks for the U.S. economy, which could impinge on Canadas growth track, especially for industrial and hotel investments. Most retail and office markets boast mid- to lowsingle-digit vacancies, and multifamily markets sustain strong demand. Toronto and Vancouver remain two of North Americas most favored investment gateways. Investors circumspectly consider Latin Americas two prime emerging markets. Brazil, in particular, shows signs of becoming a major 21st-century global player, and Mexicos burgeoning middle class craves more housing and retail space.
Notice to Readers
Emerging Trends in Real Estate is a trends and forecast publication now in its 32nd edition, and is one of the most highly regarded and widely read forecast reports in the real estate industry. Emerging Trends in Real Estate 2011, undertaken jointly by the Urban Land Institute and PricewaterhouseCoopers, provides an outlook on real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the United States, Canada, and Latin America. Emerging Trends in Real Estate 2011 reflects the views of more than 875 individuals who completed surveys or were interviewed as a part of the research process for this report. The views expressed herein are obtained exclusively from these surveys and interviews, and do not express the opinions of either PwC or ULI. Interviewees and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers and consultants. ULI and PwC researchers personally interviewed more than 275 individuals and survey responses were received from 600 individuals, whose company affiliations are broken down below. Private Property Company or Developer Real Estate Service Firm Institutional/Equity Investor or Investment Manager Other (please specify) Bank, Lender, or Securitized Lender Homebuilder or Residential Land Developer Publicly Listed Property Company or REIT 43.1% 20.5% 15.4% 10.0% 4.9% 3.2% 2.9%
Throughout the publication, the views of interviewees and/or survey respondents have been presented as direct quotations from the participant without attribution to any particular participant. A list of the interview participants in this years study appears at the end of this report. To all who helped, the Urban Land Institute and PricewaterhouseCoopers extend sincere thanks for sharing valuable time and expertise. Without the involvement of these many individuals, this report would not have been possible.
c h a p t e r
Entering the Era of Less

The problems are obvious, but the solutions
fter a hard crash, the real estate world reluctantly enters a new Era of Less in 2011encompassing a shrunken industry, lower return expectations, restrained development prospects, reduced credit availability, and crimped profits. Adding to unnerving short-term pessimism, commercial lenders and borrowers finally accelerate recognition of substantial losses (30 to 50 percent haircuts on asset values) from frenzied deal making in the years before the recent steep worldwide recession. Limping assets, suffering high vacancies and rolling-down rents, face problematic workouts and uncertain refinancing prospects as hundreds of billions of dollars of loans mature in each of the next four years, according to Emerging Trends interviewees. Housing, meanwhile, remains mired in a dead zone of reduced demand: many Americans cannot afford new homes even with recordlow mortgage rates and slumping prices. But owners of the sliver of properties with healthy cash flows in prime gateway markets enjoy significantly better outlooksa capital flight to quality buttresses prices and balance sheetsand, not surprisingly, everybody falls in love with rental apartments, the king of core-style income-generating investments. Over the next year, some real estate players could gain significantly. The smart investors who sold near market tops, avoided overleveraging, and kept powder dry are extremely well positioned to take advantage of legions of credit-starved competitors who overborrowed and overpaid. Now, the haves can attract new capital, poach tenants, and lure talent away from the have-nots. Cash-flush investors and reviving lenders should have plenty of opportunities to recapitalize debt-starved, have-not players and take preferred investment or loan-to-own positions in asset capital stacks, eventually
oblique.
reaping excellent risk-adjusted returns. For lenders back in the game and good-credit borrowers, the bottom of the cycle offers the best environment to employ leverage, especially on high-quality assets, and low interest rates only magnify the opportunity for owners. Investment managers and real estate investment trusts (REITs) with teams to lease properties and nurse asset income streams back to health can bulldoze aside many operator-light opportunity-fund boutiques, which had depended on cap-rate compression and leverage to reap appreciation. You can no longer make money off flipping; you must be able to manage assets at the property level, an interviewee said.
ExHIBIT 1-1
NCREIF Capitalization Rates vs. S&P 500 Inverse P/E Ratio

15% 15 12% 12 9% 9 6% 6 3% 3
Cap Rate Inverse P/E Ratio
Sources: NCREIF, S&P, PricewaterhouseCoopers LLP.
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0 0%
Gradually, extreme negativity in the commercial real estate universe will abate. For 2011, debt markets will thaw further as money-center banks continue to strengthen balance sheets, take their losses, and step up lending, leading to higher transaction volumes. In addition, left-for-dead conduits will increase activity. Emerging Trends surveys also point to improved prospects off last years rock bottom for all U.S. property markets and real estate sectors. This reconstituting marketplace should position real estate once again as an attractive yield-producing asset class for those investors who recalibrate investment expectations rationally. The recent lesson learned is that real estate is a low-operatingleverage business, an interviewee explains. Its very hard to get 15 percent to 20 percent rates of return without more risk and more leverage, and you cant succeed on a sustained basis. Real estate is more about cash flow and keeping buildings leased. Whats wrong with delivering unlevered, high-single-digit returns or low-teens performance for conservatively financed assets? Well nothing, especially when you consider the dismal record of the stock market over the past decade. Still, the overwhelming majority of Emerging Trends interviewees register doubts and uncertainty about the future and, especially, the subdued outlook for the U.S. economy, which not only flounders in consumer and government debt, but also struggles to create high-paying jobs in a more competitive, technology-enabled global marketplace. Our problems are much bigger than real estate, and solutions are well beyond the scope of our industry. Americans and their government have been living large off borrowing for several decades, and now the staggering bills have come due. The housing debacle, precipitated by easy credit, shakes confidence to the core, undermining personal wealth and the sense of a secure financial future. Consumption takes a necessary breather as people retrench to pay off sizable debts home mortgages, car loans, and credit cardsand increase savings rates from record-low levels. The unemployment picture appears more worrisome: even before the recession, wages and benefits had stagnated for the average American. Manufacturing jobs have leached to lower-cost overseas markets since the 1970s, slowly decimating bedrock blue-color jobs. Now the internet and telecom advances allow companies to outsource more professional and service jobs to overseas locations at reduced wages, and various computer applications eliminate office and administrative positions. Many corporate productivity gains and enhanced profits come at the expense of damping down appetites for new hires, and now government belt tightening, especially at the state and local levels, eliminates more jobs as stimulus funding begins to run dry. At the same time, 4 Emerging Trends in Real Estate 2011
ExHIBIT 1-2
NCREIF Cap Rates vs. U.S. Ten-Year Treasury Yields

Spread 10-Year Treasury Yield* Cap Rate
15% 15 12% 12 9% 9 6% 6 3% 3
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0% 0 3% -3 6% -6 9% -9
Sources: NCREIF, Moodys Economy.com, Federal Reserve Board, PricewaterhouseCoopers LLP. * Ten-year Treasury yields based on average of the quarter; 2010Q2 average as of August 31, 2010.
corporations cut back on pensions, states grapple to reduce public employee benefits, and just about everyone pays more for health insurance coverage. Again this year, Emerging Trends interviewees enter a familiar echo chamber, repeating emphatically how real estate recovery is all about jobs, but turn silent when trying to identify Americas high-growth employment-creating industries of the future. Homebuilding and commercial real estate construction certainly do not offer much hope for jump-starting employment or the economy in the near term. We really dont need much new of anything. Housing led the economy into the dumpster, and increasing home loan defaults and foreclosures curtail any chance for a sudden rebound. Sobered lenders now expect homebuyers to make downpayments and have solid credit histories before they extend mortgages, but coming out of this recession, many Americans simply cannot meet these basic requirements or turn too skittish to take a chance. Eventually population growth will absorb the overhang in housing supply, but location preferences show signs of shifting away from bigger homes on the suburban fringe to infill locations closer to 24-hour markets. Reversing decades of moving away from city centers, more people will regroup in areas where life is easier, more efficient, and less car dependentthat is, closer to shopping districts and workplaces. In the approaching cycle, the industry can expect to see more high-rise and mid-rise apartments, as well as townhouse projects, built around shopping centers and commercial districts. Failing retail space will be converted to other uses, often with
Chapter 1: Entering the Era of Less
ExHIBIT 1-3
U.S. Real Estate Returns and Economic Growth

NCREIF GDP NAREIT Composite
40% 30% 20% 10% 0% 10% 20% 30% 40%

Sources: NCREIF, NAREIT, Moodys Economy.com. * 2010 data annualized from second quarter 2009.
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
But buying time with extend and pretend may pay off for other financial institutions, including larger money-center banks and life insurers, as well as some commercial mortgage backed securities (CMBS) special servicers. They will step up writedowns and workouts as a prelude to disposing of assets when loans mature, and likely can recoup some lost value in slowly improving markets. Given the looming number of maturing loans up for refinancing starting in 2011, this painful deleveraging to lower values and disposition process could take until mid-decade to complete. But with FDIC, bank, and special servicer sales, substantially more properties will hit transaction markets in 2011 and 2012, allowing the market to begin clearing and prices finally to reset. The time approaches to absorb losses, deleverage to the new value levels, adjust, and move on.
No Way Out. In the meantime, compromised borrowers survive

on life support until they succumb finally to maturity defaults or raise new capital from eager investors taking preferred positions. Essentially, they get squashed. Most or all of their existing equity vaporizes (If you can get back to par, its a grand slam), and some high-profile developers, who took recourse financing, suffer even greater carnage (Its a personal wipeout). Sentiment grows among Emerging Trends interviewees that odds improve for owners of properties with a reasonable cash flow to overcome refinancing hurdles as liquidity returns to debt markets. For investors in more commodity assets, whose cost basis goes back to 20052007 pricing peaks, refinancing prospects hardly look rosy as long as leases roll down to market rents and vacant space stays empty.
residential components, and more underoccupied suburban office campuses will be transformed into mixed-use properties. Coming years will focus on readapting real estate to peoples revised goals, priorities, and expectations. Well be working longer, saving more, and looking for greater efficiencies in how we live and work. Simply put, an Era of Less replaces an era of bigger and more.
Muddling Along at Bottom

A reluctance and sheer inability to confront the mountain of legacy asset problems, comprising hundreds of billions of dollars in investment losses, have hamstrung lenders, delayed market repricing, and hobbled chances for a faster real estate market upturn. The U.S. government talks a brave game about improved financial market stability, but keeps interest rates at artificial lows to avoid more damage, and everyone worries that credit markets and world economies cannot endure the shock of wholesale asset writedowns. Despite widespread extend and pretend practices to avoid taking balance-sheet losses and force foreclosure on beleaguered borrowers, still-undercapitalized regional and local banks totter with overweightings of failed land and construction loans. Several hundred of these banks have collapsed into the hands of the Federal Deposit Insurance Corporation (FDIC), a process that will continue through 2011.
ExHIBIT 1-4
Emerging Trends Barometer 2011

10
n Buy
n Hold
n Sell
9
8
Rating
5
4
2004
2005
2006
2007
2008
2009
2010
2011
1 = abysmal, 5 = fair, 9 = excellent. Source: Emerging Trends in Real Estate 2011 survey. Note: Based on U.S. respondents only.
Extreme Bifurcation. The capital flight to quality, predicted in last years Emerging Trends, has produced a deep canyon separating trophy and trash assets, with a lot more trash. The best properties have cash flow, and thats what buyers and lenders want. Bifurcation results from investors protecting themselves against perceived risk in a problematic economy, and not as much from perceived opportunity and quick gains at cyclical depths. Investors have also learned from recent cycles that prime properties hold value better in downturns and appreciate more in good times. As a result, pent-up, sidelined capital swarms apartments and office buildings in gateway cities and mostly ignores just about everything else. Increasing Transactions. Market bottom should be the best time to buy, finance, and set the stage for big investment gains. But buyers have been frustrated by lenders holding back on distressed sales, and bankers have no intention of forcing assets off their balance sheets until they have built up enough loss reserves. Everyone waits for the dam to break. The Emerging Trends investment barometer indicates the gulf between buyers and sellers will start to close in 2011: selling sentiment improves dramatically from last years all-time survey lows, and acquirers realize they should not expect giant discounts on everything that comes to market; in fact, buyer outlooks dip slightly (see exhibit 1- 4).Banks will start to sell, just not at ridiculously low prices buyers want, and as resources run out, more borrowers will capitulate.
Already Overpaying? Emerging Trends interviewees

heads spin over the high prices plunked down for core properties in New York City and Washington, D.C., and amazing sub-5 cap rates achieved for some apartment deals. Have people already forgotten whats happened over the past three years? Capital appears disconnected from stillweak fundamentals, but historically rents can bounce back quickly in these markets, and demographic/housingrelated trends strongly favor multifamily investments. Many buyers find justification in below-replacement-cost numbers, but thats a useful rationale when economics dont support the purchase price. At these expensive levels, investors cannot afford any nasty surprises like double-dip recessions or outof-the-blue events. Some private equity firms and investment managers appear to force out money before client commitment terms expire. Instead of stretching on future assumptions (didnt we learn this recent lesson at significant cost?), buyers should be underwriting on current income and think about exit caps when Treasury rates, now well below historic norms, are sure to be higher. Investors also need to resize cap-rate models to include more (30 to 40 percent) equity, replacing 90 percent debt. Until people reconcile with the new reality, they could overpay.
Untouchables. At the other end of the spectrum, the early stuff from banks has all sorts of problemsproperties people dont want at almost any price. To move some of these leasing-challenged properties when buyers are experiencing the angst of economic doldrums, sellers will need to swallow hard and accept cents-on-the-dollar RTC-style pricing. Rational Returns. Emerging Trends surveys peg expected returns for calendar year 2011 in the high single digits7.5 percent for institutional-quality private real estate equity (unlevered NCREIF) and 8.2 percent for REITs. These total returns comprise 5 to 7 percent from income and additional modest Barclays Capital Government signature properties in appreciation, and greater gains for Bond Index prime markets. After a 30 percent to 40 percent loss, it could take aNAREIT Composite up ground. Opportunity inveslong time to make tors may score on one-off deals, but will be hard pressed NCREIF to realize consistent mid- to high-teens performance, especially in the absence of ample financing to fuel gains. If fund S&P 500 marketers create pro formas with returns above 20 percent, they either may be out of touch or trying to snow prospects, according to interviewees. Not surprisingly, survey respondents expect private equity real estate and public REITs to outperform the overall stock and bond marketsthe professional real estate crowd always does. But publicly traded homebuilders will lag, according to surveys (see exhibit 1-6).
ExHIBIT 1-5
Index Returns: Real Estate vs. Stocks/Bonds

S&P 500 NCREIF NAREIT Composite Barclays Capital Government Bond Index
40% 30% 20% 10% 0% 10% 20% 30% 40%

Sources: NCREIF, NAREIT, S&P, Barclays Group. * 2010 data annualized from second quarter 2009.
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
ExHIBIT 1-6
Real Estate Business Prospects in 2011

Private Local Real Estate Investors Insurance Company Real Estate Lenders Public Equity REITs Private Real Estate Equity Funds Private Equity REITs Pension Real Estate Funds Real Estate Consultants and Attorneys Real Estate Investment Managers Real Estate Brokers Bank Real Estate Lenders Mortgage REITs CMBS Lenders/Issuers Commercial/Multifamily Developers Homebuilders/Residential Land Developers Architects/Designers
1 Abysmal Source: Emerging Trends in Real Estate 2011 survey. Note: Based on U.S. respondents only.
Demand Drag: The Compromised Economy

For all the frustration about delays in market repricing and slow deal flow, Emerging Trends interviewees voice most concern about the shell-shocked U.S. economy and wonder if recent declines foreshadow a new age of diminished global clout and an ebbing standard of living. In these seemingly unchartered waters, slackened demand for real estate across all sectors (except apartments) and near-record vacancies in many markets signal a long and difficult period before developers and landlords can enjoy any renewed pricing power, and one in which investors exercise little control. The longer it takes for the economy to gain traction, the deeper the hole for real estate fundamentals to dig out. Outlooks range from mildly pessimistic (the economy will rebound at some point) to grim (it could be a ten-year valley). Virtually nobody anticipates a sharp rebound: Theyd be brain-dead. Relative optimists hope for a U-shaped recovery, but a reversed J-shape seems more likely, and everybody prays to avoid a nasty double-dip recession. Huge deficits, ongoing wars, high unemployment, and consumer debt weigh down psyches. Weve bought everything we need for a while and now must pay off the enormous bills; the deleveraging will be extremely painful. And homeowners can no longer depend on rising house prices to cover spending. People have been badly scarred by the decline in home values: for many families, the nest egg for economic security has been broken.
5.69 5.58 5.52 5.52 5.48 5.22 5.13 5.09 4.92 4.82 4.74 4.36 4.09 3.47 3.36 5 Fair 9 Excellent
Flat Lining. Adding to festering consternation and dismay are business uncertainty over new government financial market regulations, the probability of higher taxes (including property levies) to fill yawning local-government budget gaps, and the breakdown of public pension systems. In increasing numbers, cash-stretched Americans must tap into their already meager 401(k) retirement accounts to meet monthly mortgage and credit-card bills. When you visit other global regions, you realize the U.S. is not the center of the universe any longer or as dynamic, says an international funds manager. Were headed along a lackluster plateau. Hiring Malaise. More than any other issue, the sputtering U.S. jobs engine compromises sustained recovery and growth in real estate markets. People need the confidence provided by a steady paycheck to resume spending in shopping centers, look for new housing, and take vacations at resorts and hotels, while more hiring would help fill empty
office space. But interviewees just dont know where job growth is coming from immediately, and they identify various hurdles: n Many companies found they had a ton of overcapacity and the recession gave them cover to make cuts. Who says many of these jobs will be coming back? Firms learn to operate with less and enhance profitability. n Lofty compensation and benefit rates make the United States less competitive against the rest of the world. The country has lost high-paying manufacturing jobs since the 1970s to Asia and Mexico, and many remaining factories have shifted from union bastions, mostly in the Midwest and Northeast, to lower-wage, right-to-work states in the South and Southwest. n Vaunted advances in technology improve productivity while taking away domestic jobs. U.S.-based companies can easily move operations overseascall centers, financial analysis, software development, accounting, x-ray reading, etc. The internet and telecommunications make transferring information between continents seamless and instantaneous. CEOs and CFOs increasingly take advantage of global jobs arbitrage to increase profits and shareholder value, finding welleducated, English-speaking workforces to fill the demand offshore. An infinite supply of service workers spreads beyond India to China and elsewhere and pressures down wage rates here. In short, what happened to manufacturing now happens in the service sector. n Technology has created new opportunities domestically in a range of brainpower, tech-related industries, but advances have also destroyed or drastically reduced the number of many traditional jobs that supported middle-class lifestyles secretaries, file clerks, telephone operators, bookkeepers, order takers, travel agents, messengers, typesetters, newspaper reporters, and on and on. An executive with a Blackberry and a laptop needs a fraction of the office support he or she once did. These same trends directly affect real estate owners, as do the following: n Midwest factory markets have been savaged by manufacturing declines, stagnating and shrinking through a chronic slump. n Internet shopping allows for more direct factory-toconsumer distribution without as many supply-chain links, leading to less need for warehouse space and fewer and/or smaller retail outlets. n Outsourcing of jobs overseas and/or to home-based freelancers dampens overall demand for office space, especially
ExHIBIT 1-7
Importance of Various Trends/Issues/Problems for Real Estate Investment and Development 2011
Job growth Economic/Financial Issues Income and wage change Job growth
Job growth
4.94 4.21 3.91 3.90 3.65 3.59 3.54 3.52 3.46 3.12 3.01 2.85
Income and Interest rates Income and wagewage change change Tax policies Interest rates Interest rates State and local budget problems Tax policies
Tax policies
Global problems State and local budget problems State and local budgeteconomic growth Federal Global economic growth scal de cits/imbalances Global economic growth New federal nancial regulations Federal fiscal Federal scal de cits/imbalances deficits/imbalances In ation New federal regulations New federal financial nancial regulations Energy prices In ation Inflation European nancial instability Energy prices
Energy prices
Exhibit 1 Exhibit 1 Importan Importan Various T Various T Issues/Pr Issues/Pr Real Esta Real Esta ment an ment an ment 20 ment 20 Exhibit 1 Exhibit 1
Trade cits/imbalances Europeande instability European financialnancial instability Trade de cits/imbalances Trade deficits/imbalances
Social/Political Issues Social/Political Issues

Immigration Social/Political Issues
Immigration
War issues Threat of terrorism
3.02 2.88 2.88 2.61 2.33
Threat of terrorism Immigration Threat of terrorism
War issues
Social equity/inequality War issues Social equity/inequality
Climate change/global warming

Climate change/global warming Social equity/inequality Climate change/global warming Real Estate/Development Issues Real Estate/Development Issues Re nancing Real Estate/Development Issues
Refinancing
4.46 4.33 4.25 3.70 3.63 3.63 3.62 3.48 3.31 3.16 3.15 3.10 3.07 3.05 3.00 2.95 2.87 2.81 2.77
0 1 2 3 4 5
Vacancy rates Vacancy nancing Re rates Deleveraging Vacancy rates Deleveraging Deleveraging InfrastructureInfrastructure funding/development funding/development Future home price stagnation/de ation Infrastructure funding/development Future home price stagnation/deflation Future homeFuturestagnation/de price home inflation Future home price price in ation CMBS market in ation CMBS Future home recovery market price recovery Transportationrecovery CMBS market funding Transportation funding Urban redevelopment Transportation funding Urban redevelopment A ordable/workforce housing Urban redevelopment Affordable/workforce housing Growth controls A ordable/workforce housing
Growth controls
Construction materials costs Growth controls Construction materials costs Construction labor Construction materials costs Construction labor costs Land Construction labor costs
Land costs
investing ResponsibleResponsible propertyLand costs property investing Sustainable development Responsible property investing Sustainable development NIMBYism Sustainable development
NIMBYism
buildings Green GreenNIMBYism buildings Land availability issues Green buildings Land availability issues Land availability issues
1 = no importance, 2 = little importance, 3 = moderate importance, 4 = considerable importance, 5 = great importance. Source: Emerging Trends in Real Estate 2011 survey.
in secondary and tertiary markets, as well as in the suburbs of major cities. The bottom line is we need to create more jobs to drive the real estate economy and until we do, real estate economics will get worse; just making up the 8.4 million jobs lost in the recession will be a long haul. Logical growth sectors remain high tech and engineering, which need to create the new new thing to sell to the rest of the world; education, to help generate more higher-paid brainpower workers, especially in the tech, energy, and life science fields; health care, to address the bulge in aging demographic cohorts; and finance, to shelter and husband remaining wealth.
Inflation versus Deflation and Higher Interest Rates

Record-low interest rates (essentially zero) have been a lifeline to both real estate lenders and borrowers. Survey respondents expect rates to remain where they are through 2011 and expect inflation to stay under control for the year. But over the next five years, they forecast both higher rates and mounting inflation (see exhibit 1-8). Were in such a big hole, the only way out is to print money. The central bank will keep its foot on the gas to stimulate economic growth, putting people back to work and ultimately bringing on inflation.
Necessary Austerity. Near-stagnant U.S. wages and the absence of free-flowing credit unsettle Americans while creating strong headwinds for maintaining the nations upscale way of life. Our gold standard may go down a notch. The United States will remain at the top of the pile, but lifestyles could ebb for the masses, creating winners and losers. Unhinged from charge cards and interest-only loans, people must do more with what they have. As personal austerity becomes more of a reality, expectations adjust and frugality returns: Were shifting away from defining success by how many toys we own. Twenty-four-hour markets attracting highly educated workforces and brainpower jobs will do better, but more commodity markets depending on lower-paying back-office, manufacturing, and service-sector employment could flag. Six-figure salaries are alive and well in global pathway markets, but nothings going on in many other cities. This turn in the road happens gradually, playing out over coming decades: the credit crisis marked the beginning, and people are in reset mode, spending less and becoming more value oriented. Real estate players need to monitor how families cope. Two-earner households allowed a middle-class existence; now we may need three. Grandparents, parents, and grandchildren may have to share resources and live together longer. Many graying baby boomers have insufficient retirement savings, and young adults, now struggling to find jobs, may have to downscale expectations.
Inflation Benefits. For the present, investors discount inflationary impacts and focus instead on getting yield, taking advantage of low financing rates if they can qualify to obtain credit. Inflation may let you earn your way out of your loan, and a locked-in low rate could look good if interest rates increase later on. A gloomy minority of respondents contemplates a double-dip recession with accompanying depreciation, short-circuiting any nascent recovery. If deflation
ExHIBIT 1-8
Inflation and Interest Rate Changes

n 2011 2.96 4.04 n Next Five Years
2011
Inflation
Next Five Years
Short-Term Rates (One-Year Treasuries
3.08 4.16
Commercial Mortgage Rates
3.22 4.26
Exhibit 1-3 In ation and Interest Rate Changes Exhibit 1-4
Long-Term Rates (Ten-Year Treasuries)

0 0
3.23 4.18
4 4
5 5
1 = fall substantially, 2 = fall moderately, 3 = remain stable at current levels, 4 = increase moderately, 5 = increase substantially. Source: Emerging Trends in Real Estate 2011 survey. Note: Based on U.S. respondents only.
occurs, were all in the wrong business, says an industry veteran. But if inflation is coming, real estate is the right place to be, and its time to get back in the game. Investment marketers may want to dust off their old playbook left over from the early 1980s touting the inflation-hedge benefits of property assets. Over the next five years, that could help ignite transaction markets and put real estate back in vogue again. But an industry warhorse warns that inflation will not rescue property investments if demand does not escalate to absorb vacant space. In the 1970s, double-digit inflation didnt help real estate, because of the oversupply.
Function over Form. For the future, office developers may

look to cut costs by incorporating more modular, cookiecutter, streamlined designs, offering different exterior finishes to tenants. The future promises more value-oriented development, not ostentatious projects. Tenants will emphasize function and efficiency, and green, energy-saving sustainability features will be expected.
Bubble Threat. A leading real estate economist raises a

caution flag about an extended period of low interest rates. If yield-hungry investors continue to gravitate to the current attractive spreads between prime properties and Treasury bonds, an asset bubble could develop, leading to another sudden correction when rates inevitably increase. It all depends on the Fed; we need to be careful.
Consolidation. Recessionary impacts continue to whack many undercapitalized developers. Bigger companies have many more resources than smaller competitors. Survivors need to deleverage further and protect equity for possible future shocks to the system. Some companies will merge and consolidate; weaker firms get folded into stronger platforms.
Regulation and Taxes

New Regulation Maze. Uncertainty over new financial
industry regulation and future federal tax policy adds complexity and confusion to investment decision making, and many interviewees complain businesses cant move aggressively on expansions and growth strategies, which might help fill buildings. There are too many unknowns to make any decisions. Federal agencies scramble to write new banking rulesthe devil is in the detailswhile lobbyists angle to gain favorable language (read: protect industry profits). Among the biggest outstanding issues will be how reserve requirements are meted out. Must CMBS loan originators retain a certain percentage of junior B tranches to ensure underwriting vigilance, or will CMBS 2.0 operate like CMBS 1.0 off moral hazard? Investment banks, meanwhile, position themselves to shed asset-management funds if reserve requirements seem too burdensome on co-invested house money.
Supply Side: Development Stall-Out

Absence of demand, rather than overdevelopment, has spurred record or near-record vacancies across many markets and asset sectors. Fortunately, no new anything is coming on line, so when the economy improves, rents can start to increase more quickly. Overall, developers have little chance to obtain construction financing: most bankers assume the fetal position if a builder heads their way. But life insurers consider construction take-outs for apartment projects, if developers can provide enough equity40 to 60 percent of cost. Joint venture investments in apartment development can be better than buying, says an insurance executive. Land is a quarter of peak value; construction costs are down 25 to 30 percent. You can make attractive investments in development on high-quality apartment or industrial properties, even with lower rents. A handful of singular office projects in site-constrained 24-hour markets can be expected to get funding, too, by year-end 2011, if the economy appears to be on sounder footing. These first-outof-the-ground projects always score well early in sustained recoveries. Otherwise, the few office developments nationally will be limited to build-to-suit/net-lease deals and government buildings. Rents just dont justify doing anything. Its dead.
Changing Tax Rates. Tax policy presents another investor conundrum, especially capital gains treatments. Investors want to keep long-term rates at current low levels, but the government desperately needs enhanced funding sources. Everyone grapples to secure new advantages or keep existing ones. We need a tax policy to encourage long-term investing, says an exasperated developer/owner. We should think about increasing shorter-term capital gains taxes and lowering long-term gains below current levels for extended holding periods. Right now there are no advantages to long-term investing, and assets like real estate are marginalized as a result. We trade and flip rather than build value over time.
10
ExHIBIT 1-9
Firm Profitability Forecast 2011

Profitability in 2010 by Percentage of Respondents
Very Poor 7.6% Modestly Poor 11.2% Modestly Good 13.0% Very Good 5.3%
Abysmal 6.1%
Poor 12.5%
Fair 27.8%
Good 15.5%
Excellent 1.1%
Profitability in 2011 by Percentage of Respondents

Very Poor 3.2% Modestly Poor 7.8% Modestly Good 22% Very Good 8.2%
Abysmal 0.8% Poor 6.3%

Source: Emerging Trends in Real Estate 2011 survey. Note: Based on U.S. respondents only.
Fair 26.3%
Good 22.5%
Excellent 2.9%
Fannie/Freddies Fate. At some point, Congress must come to grips with the future of Fannie Mae and Freddie Mac, the mortgage-market black holes, which prop up single-family and multifamily housing with hundreds of billions of dollars in federal infusions. Expected changes could make borrowing more expensive in the residential sector, and given the recent debacle, that may be a good outcome.
Survival of the Fittest. There is a shakeout among investment managers and private equity firms: poor performers flunk and lose business to stronger firms with broader asset-management and service platforms. Many opportunity investment managers leave the scene: they cannot wring promotes from legacy disasters, and their prospects for new investments remain limited without a bubble market and easy financing. Banks and special servicers still have trouble building teams of experienced workout specialists; if acquisitions pros want jobs, that is the place to go. Lawyers always seem to find ballastshifting from closing transactions to handling litigation and negotiations between various stakeholders, trying to secure what is left from soured assets. On the leasing side, brokers must have global coverage figured out to serve big companies. Owner reps will work harder than ever before to find and keep tenants, while tenant brokers can exert plenty of leverage. In this environment, career paths reward seasoned, experienced, plodding types rather than entrepreneurs.
Real Estate Industry: Chastened and Smaller

While developers and homebuilders have been hammered uniformly, the rest of the real estate world struggles to revive in slimmer form. A downsized industry feels more permanent than temporary, says an interviewee. We dont need much new construction in any category; commercial transaction activity was way out of kilter and will not ramp up to pre-downturn levels, and home mortgage financing volumes may take many years to recover to 2006 peaks. Deal makers, sales brokers, and mortgage brokers will not be in huge demand, although hiring is bound to pick up in 2011. Future deal making may not be as labor intensive or as profitable for brokerage firms. It used to be you hired a broker for industry relationships to sell a property. Now you can reach the market effectively through a flyer to an e-mail list. Relationships are worth something, just not as much.
Higher Profits. All the reconfiguring should help improve

industry productivity and profitability from dismal nadirs, and, notably, survey respondents turn somewhat optimistic. More than 80 percent expect "fair" or better company profitability in 2011, up from 65 percent in 2010. And more than 30 percent predict a "good" to "excellent" year ahead. Less than 20 percent anticipate "modestly poor" or worse performance in 2011, compared with more than 35 percent in 2010 (see exhibit 1-9).
11
Best Bets 2011

Buying at or near cyclical bottom typically offers substantial opportunities, and 2011 is no different. But investors should be wary about obsolete and fringe assets, which have considerable downside risk even in recovery. Sitting on hands and waiting until the economy regains certain vigor still makes sense to more conservative Emerging Trends interviewees. And given longer-term trends, investors naturally should exercise greater circumspection. You just cant throw dollars around in a time of slow growth.
Remember: Patience Is a Virtue. Transaction activity

will increase, and more value-add and distressed deals will appear. Theyre coming as the pressure of time builds for lenders to push more failed properties into the market. Patient investors can be rewardedyoull get a better price per poundbut buyers should have no illusions about rapidly improving revenues and a return to quick flipping. A slowgrowth economy and more limited credit availability will not escalate pricing, except possibly in prime, flight-to-quality core markets. Familiar hot-growth Sunbelt cities may not enjoy a typical overheated expansion in any recovery.
Investment
Temper Expectations. Dont try to shoot the lights out and expect outsized returns. Buy well-leased core assets, looking for 6 to 7 percent cash flows. Appreciation will follow as markets improve. The best properties in the best markets always perform better whether over shorter or longer hold periods. Lock In LeverageIf You Can. Mortgage rates cannot get much lower, and cyclical bottom is the optimal time to leverage properties in order to magnify future value gains as property fundamentals ameliorate. Provide Debt and Recap Equity. Lenders only slowly reenter the market at a time when a flood of borrowers needs refinancing and recapitalizing. Debt is scarce and dollars needed. Players who fill the gap on assets with lowered cost bases can obtain excellent risk-adjusted returns up and down the capital stack, including mezzanine debt and preferred equity, if not loan-to-own opportunities. Concentrate on good assets with bad balance sheets. Focus on Global Gateways, 24-hour Markets. Everybody wants to be in the primary coastal cities with international airport hubs. Business and commerce concentrate there, attracting more highly educated workers to higher-paying jobs. But high quality costs more, so prepare to pay up. When deals get too pricey, back off and move down the food chain. Favor Infill over Fringe. Move-back-in trends gain force.
Twenty-something echo boomers want to experience more vibrant urban areas where they can build careers, and their aging baby boomer parents look for greater convenience in downscaled lifestyles. Driving costs and lost time make outer suburbs less economical, while the big-house wave dissipates in the Era of Less.
Buy or Hold REITs. Do not expect another big run-up, but these companies appear well capitalized, can be accretive buyers, and concentrate strong core holdings in apartments and retail and office space. Liquidity is always a plus. Survey respondents expect solid cash-flowing returns. Buy Land. It will not get any cheaper than it is now, but prepare to wait (a long time) for the right development opportunity. Infill sites hold greater promise than greenfield locations. Exercise Caution on Distressed Loan Pools. They
could be a recipe for disaster, if you dont underwrite the assets properly. Too many wont recover.
Development
Stay on Vacation. Except for some apartments, the odd warehouse, and select build-to-suit office projects, new construction activity will be basically nonexistent. Why build when you can buy existing for so much less? Demand for new premium product is probably three to five years out, so plan accordingly and time recovery. Schedules for anything on the drawing board stretch out as the focus shifts to redevelopment and enhancement activity. Commercial developers should think beyond the U.S., looking to export talent to emerging markets that need new facilities. Homebuilders remain severely challenged: bulging inventories of existing houses hold back new construction, and prices continue to sink in some markets.
12
Property Sectors
Buy or Hold Multifamily. Rental apartments will outperform
everything else. In addition to positive demographic trends, even the dampened recovery and housing market shambles are pluses because more people cannot afford to buy or stay in homes. Subsidized financing from Freddie and Fannie just ices the cake. Institutional buyers push up prices close to peaks in prime infill areas, and interviewees expect rent spikes by 2012.
Buy Select Hotels. Always the most volatile property sector,

hotels should be excellent buys at or near bottom. Theyre the cheapest and will come back the fastest. Target downtown full-service hotels in major markets: many owners overleveraged late in the market cycle and are vulnerable. No one gets excited about high-capex resorts or limited-service brands in commodity areas.
Buy Condos and Single-Family Housing. Markets have

collapsed, the population will increase, and demand will return eventually. Now is the time to buy your dream house, if you have enough cash. But this is not a speculators market: do not expect a sudden future ramp-up in prices, except in the choicest urban neighborhoods and waterfront locations where values also tend to hold up better anyway. Avoid commodity, half-finished subdivisions in the suburban outer edge and McMansions; they are so yesterday. For good-credit borrowers, now is also the time to finance at locked-in, long-term rates.
Buy or Hold Select Retail. Infill shopping centers with top

supermarket chains and fortress malls sustain performance through the consumer pullback. Darwin rules everywhere else in the oversupplied retail universe.
Buy or Hold 24-hour, Gateway Office. Premier downtown buildings remain investor mainstays in New York City, Washington, D.C., and the select few 24-hour markets situated along global pathways. Suburban office space outside urbanizing nodes gets a big thumbs-down in Emerging Trends surveys.
13
c h a p t e r
Real Estate
Capital Flows
If you have a trophy property, lenders will come after you out of the woodwork. If you have a dog, you get
foreclosed.
n the capital markets, the gulf between the haves and have-nots will become more apparent during 2011. The cash rich and well capitalized should feast off the cash poor and overleveraged. Big lenders should capture more market share, while more small banks nosedive into oblivion. If you are a borrower with bad credit, youre fried. If you are a buyer with dry powder, you should have plenty of options. In 2011, the huge spin game of extend and pretend also finally starts to run its course. Were deferring losses to build up capital, and we want to keep regulators off our backs by maintaining manageable capital ratios, says a leading lending executive. Regulators know what is going on; [they] just dont want events to force them to notice. But at some point we will be able to take the losses and pull the trigger on writedowns, either when foreclosures cant be avoided or when its time to refinance.
at-the-bit equity players to launch into buying or recapitalizing more challenged properties.
Filling the Void. Absent a major economic speed bump

(like the dreaded double dip), there may be enough capital
ExhIBIT 2-1
Sales of Large Commercial Properties

120 120 100 100 80 80
Billions of Dollars
Billions of
Exhibit 2-19 Sale Large Commercial ties Exhibit 1-6 last yea
More Realistic
The odds increase that lenders will drop the hammer on troubled borrowers (the have-nots), and rationally leveraged owners (the haves) will be able to obtain precious refinancing when their loans reach maturity. It all depends on the quality of the asset and the prospects for improving cash flows. In a limbo zone between the haves and have-nots are the have-lesses. If youre not good enough to get refinanced and youre not bad enough to get foreclosed, you can get an extension, as long as you can cover debt serviceand live on to have your fate decided down the road. In any case, the debt capital markets become more liquid and get more realistic about asset values, setting the stage for champing-
60 60
40 40
20 20 0 0
Source: Real Capital Analytics Limited to properties $10 million or greater. * Total through June 30, 2010.
2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2*
15
ExhIBIT 2-2
CMBS Delinquency Rates

10%
10
ExhIBIT 2-3
Real Estate Capital Market Balance Forecast for 2011

Equity Real Estate Capital Market
14.9% Substantially Undersupplied 22.5% Substantially Oversupplied
Delinquency Rate, Monthly Delinquency Rate Average since 1999
8 8%
6 6%
20.0% Moderately Undersupplied
10% In Balance
32.7% Moderately Oversupplied
4 4%
Debt Capital for Acquisitions

32.8% Moderately Undersupplied 5.7% Moderately Oversupplied
2% 2 0% 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
2010*
46.1% Substantially Undersupplied
13.7% In Balance 1.6% Substantially Oversupplied
Source: Trepp LLC. * Through August 2010.
Debt Capital for Refinancing

40.9% Moderately Undersupplied 3.3% Moderately Oversupplied
for refinancing, as long as you have a decent property, confirms another lender. Life insurers are fully engaged; banks will start to fill more of the void; new debt funds, sovereign wealth funds, and mortgage REITs will help; and, make no mistake, even conduits are coming back. But realistically, its a huge gap to fill.
42.1% Substantially Undersupplied
12.7% In Balance 1.0% Substantially Oversupplied
Writedowns and Restructuring. Amid skyrocketing delinquencies (see exhibit 2-2), lenders and special servicers have already started taking more writedowns on discounted payoffs of debt, borrowers register losses so they can raise cash to put out another fire, and new asset cost bases take into account higher vacancies and rolling-down rents. Workouts include earn-outs and hope notes; the key for lenders is can the borrower pay something? Loan-to-value (LTV) ratios are not as important. Who really knows what the value of some of these assets is? Where property metrics deteriorate in the face of tenant losses and borrowers run out of capital, lenders move more expeditiously to foreclose. They realize its better to take a hit and create a structure to stabilize the property than suffer greater losses. Banks will feed more distressed assets into sales markets as they can, but in the meantime, financial structure right-sizing is happening.
ger players, and these already better-capitalized owners and buyers then take advantage of mortgage rates that are reasonable, thanks to Fed monetary policy. Smaller players more likely get left out in the cold. The corporate guy can borrow a lot more, says a Texas sharpshooter. REITs have a much bigger advantage in getting credit over the small guy.
Bigger Is Better. For new loans, its a very binary market where life companies kill each other to finance core properties and most everything else goes wanting. The handful of too-big-to-fail money-center banks, buttressed by low interest rates and various federal infusions, will become more active. But back-in-the-game lenders will favor institutions and big16 Emerging Trends in Real Estate 2011
Achilles Heel. The brightening outlook for major market financial institutions and their better-capitalized clients does not necessarily extend to hobbled banks based in commodity markets. These regional and local banks, which serve less well-heeled investors, developers, and businesses, must continue to kick the can down the road, surviving on lowinterest-rate life support. Either their balance sheets improve or regulators take them over. Its a failed business model, says a big banker. Where do they get the money? While these banks struggle to buy more time, it may be running out for some drowning in underwater construction and land loans to homebuilders and local developers, as well as a flood of defaulting home mortgages. If the housing market remains in
Chapter 2: Real Estate Capital Flows
NEW ExhIBIT 2-4
Active Buyers/Acquirers of Real Estate in 2011

New Exhibit 2-17 Active Buyers/Acquirers of Real Estate in 2011 bar chart similar to 2-4
NEW ExhIBIT 2-5
Active Providers of Debt Capital in 2011

Insurance Companies Nonbank Financial Institutions Government-Sponsored Entities 2.17 2.41 2.41 2.70 2.78 3.07 3.08
0.5 1.0 1 1.5 2.0 2 2.5 3.0 3 3.5
Public Equity REITs Public Equity REITs
2.07
Private Local Investors Private Local Investors
2.10
Private REITs Private REITs
2.11 Mezzanine Lenders
Private Private Equity/Opportunity/Hedge Funds Equity/Opportunity/ Hedge Funds Cross-BorderCross-Border Investors Investors Institutional Investors/ Institutional Investors/Pension Funds Pension Funds
0.0 0 0.5
2.13 Mortgage REITs 2.23 Commercial Banks 2.45

1.0 1 1.5 2.0 2 2.5
3 4 5
Securitized Lenders/CMBS
0.0 0
1 = strongly agree, 2 = agree, 3 = undecided, 4 = disagree, 5 = strongly disagree Source: Emerging Trends in Real Estate 2011 survey. Note: Based on U.S. respondents only.
1 = strongly agree, 2 = agree, 3 = undecided, 4 = disagree, 5 = strongly disagree Source: Emerging Trends in Real Estate 2011 survey. Note: Based on U.S. respondents only.
intensive carea likely prospectmore small-fry banks could flatline, straining government agencies like the FDIC, limiting refinancing opportunities for their borrowers, and undermining chances for recovery.
Market Schizophrenia. Emerging Trends surveys capture the essence of market disconnect and bifurcation. More than 55 percent of respondents see equity capital moderately to substantially oversupplied for 2011a reaction to the recent investment surge into a few 24-hour cities and the multifamily sector (see exhibit 2-3). They view this activity as a leading
ExhIBIT 2-6
indicator of the depth of sidelined equity poised to pounce back into the market, though they question the eagerness to pay up for properties so early in the cycle. But debt capital for both refinancing and acquisitions will continue in undersupply, according to surveys, a result that underscores an unsettling reality: there are many more troubled borrowers with crappy assets than rationally leveraged owners with solid properties. In 2011, REITs and well-capitalized private investors should have the best opportunities to take advantage of market imbalances (see exhibit 2-4). Life insurers are best positioned on the debt side.
ExhIBIT 2-7
Equity Underwriting Standards Forecast for the United States
Debt Underwriting Standards Forecast for the United States
Less Rigorous 32.8%
Remain the Same 40.6%
More Rigorous 26.6%
Less Rigorous 41.0%
Remain the Same 29.2%
More Rigorous 29.8%
17
Some Underwriting Slack. The degree of less-rigorous underwriting standards experienced in slowly thawing markets (see exhibits 2-6 and 2-7) depends on the condition of your financial institution and the state of your balance sheet. After silence at the banker door for more than two years, any attention extended to anxious borrowers signals some welcome loosening. Most lenders and equity investors play it safe, steering clear of trouble, but they will continue to invest in top-tier assets and begin to underwrite more core-plus deals, as well as some value-add opportunities in the apartment sector. Aside from the frenzy over trophy institutional assets, lenders typically will demand significant equity downpayments (LTVs in the 50 to 65 percent range) and recourse.
Banks and Insurers

Without regulators breathing down their necks, the money-center banks will continue to deleverage gradually, building loss reserves, stepping up writedowns, and lending moremostly to high-credit-rating customers. They assess asset by asset, preferring well-leased office properties and accommodating multifamily borrowers. But they shy away from hotels and show concern about retail. Some local and regional banks face more daunting challenges: outsized distressed debt portfolios deteriorate further without a vibrant employment outlook and improving demand for housing and commercial space. They cannot sustain restructuring or marking loans to marketvalues have declined too muchand they have little or no capital to refinance or make new loans. Investors waiting to gorge on bank
ExhIBIT 2-8
real estateowned (REO) dispositions may continue to be disappointed until they reduce expectations. If opportunity funds had a brain, they wouldnt be talking to us; theyd be talking to borrowers, says a money-center banker. Were not sellers at their prices. After a decade when banks and upstart conduits relegated insurers to minor status, conservative life companies temporarily rule the roost in commercial mortgage markets, and have homed in on their bread and butterloans on trophy assets in larger markets. Insurers need to get more dollars out because the liabilities of favored annuity products match better to mortgages than did old-school whole life policies. An insurance executive admits to aggressive bidding on signature assets, but getting a 4 percent or 5 percent rate spread with a mortgage looks relatively good compared to sitting on cash in money markets; values were so hammered on these properties, todays LTVs will look smart in a recovery. Insurers have also been able to attract borrowers willing to take higher rates than banks offer in return for nonrecourse loans. Life companies have not escaped distress, but they have helped themselves by lending on a better class of property and dealing proactively with problems. Unlike banks, well shift bad assets into equity portfolios more quickly and have been successful in pressuring borrowers into fronting capital to avoid foreclosures. Still, these institutions bend over backwards to avoid red-flagging nervous state regulators, who could raise capital reserve requirements. Like banks, we dont want foreclosures on our books, and well make allowances to borrowers if we must. The life companies also
Maturing Loans: Preferred Strategy for Lenders by Mid-2011

Extend with Mortgage Modification 63.2% Extend without Mortgage Modification 7.1%
ExhIBIT 2-9
U.S. Life Insurance Company Mortgage Delinquency and In-Foreclosure Rates

88 77 66
Percentage
Delinquency In Foreclosure
55 44 33 22
Exh U.S. Mo In-F
Sell to a Third Party 13.5%
Foreclose and Dispose 16.2%
11 00
1988Q1 1988Q4 1989Q4 1990Q4 1991Q4 1992Q4 1993Q4 1994Q4 1995Q4 1996Q4 1997Q4 1998Q4 1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4 2007Q4 2008Q4 2009Q4 2010Q2 Sources: Moodys Economy.com, American Council of Life Insurers.
18
own large CMBS portfolios with plenty of bonds backed by thousands of assets destined for distressed debt funds. Nobody underwrote this stuff.
Wall Street
The big Wall Street investment banks look to regroup after taking the brunt of blame for directing capital into overheating property markets through complex securitized loan structures in what turned out to be a value mirageinspired fee fest. Interviewees expect these firms to return in force once they figure out how to navigate federal regulatory reform. Real estate needs capital, and the Street provides it. For starters, bankers structure new CMBS deals to kick-start the moribund mortgage securities market and watch for opportunities to take struggling private operators public. Theyre resilient and will find a way to get their noses under the tent.
CMBSConduits and Special Servicers

Make no mistake: CMBS markets have begun to resuscitate. They will come back slowly and gradually, says a leading workout specialist. Teams are in place to begin originations and refinance, and there are plenty of dollars out there to
ExhIBIT 2-10
U.S. CMBS Issuance

250 $250
200 $200
Total (Millions)
150 $150
100 $100
$50 50
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Commercial Mortgage Alert. * Issuance total through September 7, 2010.
2010*
0 0
start buying, but first you need properties to go through the washing machine and take losses. The game has started. Various interviewees affirm outlooks for a revived $75 billion to $100 billion bond market within a few yearsstill far short of its $250 billion zenith in 2007. In the early going at least, loans will settle in the 70 to 75 percent LTV range, based on well-underwritten fundamentals. Major banks and investment banks will lead the way in putting together loan pools. New regulations will mandate greater disclosures to investors, who will require originators to retain stakes in offerings. The big open regulatory question is whether federal agencies will mandate issuers and originators to retain stakes in B pieces, and how big those stakes will be. The industry argues that the market can dictate the process, but obviously that didnt work going into the crisis. The only way to head off a repeat of the recent debacle is to require issuers to retain a percentage of each securitization and force underwriting discipline, argues an interviewee. Rating agencies cant do the job: they were overwhelmed by the sheer volume of assets in offerings and have conflicts because sponsors pay their fees. Early next-generation CMBS offerings have focused on single-borrower portfolios, the same way CMBS got kicked off in the mid-90s. Interviewees disagree over the impact of maturing CMBS loans on debt markets. Views range from CMBS is the single biggest disruption and the black hole of refinancing, to the wall of loans is overstated. But consensus reigns that virtually any loan underwritten five years ago cant be refinanced at par. Borrowers complain that inundated special servicers will not address workout solutions for problem loans until a default, and then its too late because tenants often have left and cash flows plummet further. While workouts happen, special servicer hands are largely tied by whats in loan documents. They do not want to open themselves up to lawsuits. Without a default and sale, its very hard for them to take a discount on a securitized loan. What youll see is increasing numbers of loans foreclosed and sold in an orderly fashion at distressed prices, but not huge numbers of restructures. Critics complain that special servicers ring up more asset-management fees the longer it takes to resolve problem loans. Recent acquisitions of special servicers by private equity firms with B-piece portfolios may force action: these special servicers foreclose on more borrowers rather than just sitting around, extending deals, and collecting fees. But interviewees point out conflicts. They may hold off on foreclosing if their B pieces take too big a hit. For years, Emerging Trends interviewees have predicted a mountain of lawsuits between tranche holders over failed CMBS investments. But so far only limited numbers of lawsuits have been filed, despite significant losses among bond Emerging Trends in Real Estate 2011 19
Foreign Inve 1000

U.S. Real Estate Capital Sources
ExhIBIT 2-11
Pension Fun
Private Investors (Larger Properties) REITs (Equity and Hybrid) Pension Funds Foreign Investors Private Financial Institutions (REO) Life Insurance Companies Public Untraded Funds
U.S. Real Estate Capital Flows 19982010
$600
Equity
500
Billions
$500
REITs (Equit
$400
$300
$200
$100
2500
$0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Private Inves Equity
Public Un
$2,000 2000
Debt
$1,500 1500
$1,000 1000
500 $500
Mutual Banks, S&Ls, Pension F Savings Banks Commercial Mortgage Securities Mortgage Life Insurance Companies Governm REIT Unsecured Debt Government Credit Agencies REIT Unse Mortgage REITs Pension Funds Public Untraded Funds Insura Life
Billions
0 $0
Commerc
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Roulac Global Places, from various sources, including American Council of Life Insurers, Commercial Mortgage Alert, Federal Reserve Board, FannieMae. com, IREI, NAREIT, PricewaterhouseCoopers, and Real Capital Analytics. Note: Excludes corporate, nonprofit, and government equity real estate holdings, as well as single-family and owner-occupied residences. *2010 figures are as of second quarter, or in some cases projected through second quarter.
Banks S&L
20
ExhIBIT 2-12
U.S. Real Estate Capital Sources 2010
n Private Debt
U.S. Real Estate Capital: $4,058.9 Billion
$2,153.7 Billion $790.3 Billion $804.8 Billion $310.1 Billion
n Public Debt
n Private Equity n Public Equity
Private Debt
Public Debt
n Banks, S&Ls, Mutual

Debt Capital: $2,944.0 Billion
Savings Banks $1,735.4 Billion Companies $240.1 Billion $160.6 Billion
n Commercial Mortgage
Securities $614.6 Billion Agencies $150.9 Billion $23.7 Billion $1.1 Billion
n Life Insurance
n Government Credit n Mortgage REITs n Public Untraded Funds
n REIT Unsecured Debt n Pension Funds $17.6 Billion

Private Equity
Public Equity
n Private Investors
Equity Capital: $1,114.9 Billion
(Larger properties) $454.2 Billion $184.0 Billion $95.2 Billion Companies $25.1 Billion
n REITs
(Equity & Hybrid) $290.8 Billion $19.3 Billion
n Pension Funds n Foreign Investors n Life Insurance n Private Financial

Institutions (REO) $46.3 Billion
n Public Untraded Funds
Sources: Roulac Global Places, from various sources, including American Council of Life Insurers, Commercial Mortgage Alert, Federal Reserve Board, FannieMae.com, IREI, NAREIT, PricewaterhouseCoopers, and Real Capital Analytics. Note: Excludes corporate, nonprofit, and government equity real estate holdings, as well as single-family and owner-occupied residences. *2010 figures are as of second quarter, or in some cases projected through second quarter.
21
owners, who probably calculate that avoiding brain damage of litigation is worth just liquidating at market-clearing prices. Dealing with these issues demands sophisticated analysis, and most tranche holders dont know what to do with impaired assets. They can take a loss or hire a lawyer, says a distressed loan specialist. The best solution probably means selling out to a bond holder with a major position and getting something back.
ExhIBIT 2-13
Strategic Investment Allocation Preferences for 2011

Core Investments 27.1%
Development 10.5% Core-Plus Investments 15.6% Value-Added Investments 21.8%
Mezzanine Debt
Filling the recapitalization gap looks ready-made for mezzanine debt investors, who can claim less-risky positions in the capital stack or angle for loan-to-own deals. Were comfortable going up and down the stack, including doing highleverage loans again, says a mezz specialist. The bottom of the market is when youre best positioned to take more risk. Todays mezzanine-player mix no longer includes financial engineers; instead, they are typically real estate pros who either count on making a good return on their loan or can take over and manage the assets if necessary, counting on improving fundamentals. Mezz lenders will concentrate on borrowers, who negotiate with banks and special servicers to bring new dollars into their assets and write down values. Mezz debt comes to the rescue at a reduced cost basis, injecting funds to stabilize and lease up half-empty buildings. The alternative for banks and servicers is to let assets waste. But interviewees warn about ruthless mezzanine lenders, who dont want to work with borrowers. They just want the property.
Opportunistic Investments 24.9%
Opportunity and Core Funds

Investment banks and boutique firms bulge with leftover commitments for opportunity strategies, marketed to investors before the crash. Others raised money more recently in anticipation of buying into widespread distress, and a raft of managers troll for dollars to execute high-return strategies. Many marketing pitches claim they can deliver 20 percent annualized returns, fearing they will not attract capital at less. In this market, the old opportunity model doesnt fit since you dont have the leverage and wont be able to make money pay back in three to five years. Return expectations must ratchet down: 12 to 15 percent is the new 25 percent. Get used to it. New funds should shoot for 14 to 16 percent, and hope inflation eventually brings up performance. Those opportunity managers in investment mode rationalize paying core-style prices in primary markets or take big risks in secondary and tertiary locations to buy really cheap 22 Emerging Trends in Real Estate 2011
in the face of no tenant demand. Its hard to find deals that make any sense. They can only hope banks and the FDIC become more active sellerssoon. Most interviewees agree that distressed debt pools have the biggest upside potential, but they will be highly risky, too, with plenty of assets that have no chance of recovery. The jury is out on whether buying large loan pools will produce outsized returns. Extremely well positioned are a few core real estate managers with relatively low-leverage, open-end funds, which attract money not only from pension plan sponsors and endowments, but also foreign investors. These core accounts are loaded with cash-flowing, leased properties and look like they have nothing but cyclical upside ahead because they already took large, mark-to-market writedowns. Interviewees suggest returns are probable in at least the high single digits, mostly from income, but additional appreciation kicks in from upticks of holdings in favored gateway markets. Investors also know what they are buying; these are not blind pools. Some advisers push so-called core-plus strategies, suggesting somewhat higher returns, but distinctions in strategies get fuzzy. What does [core plus] mean? Value-add managers will begin selling prospects on funds that buy Class B/B apartments for upgrades to take advantage of renewing multifamily demand and expected rent bumps.
REITs
Most public REITS have skated through the downturn, emerging in better shape than many capital market competitors.
ExhIBIT 2-14
ExhIBIT 2-15
Percentage of Your Real Estate Global Portfolio in World Regions

n 2011 n 2016
87.5 82.4 4.9 5.4 4.7 6.8 2.2 4.5 0.7 0.9
0% 0 20% 20 40% 40 60% 60 80% 80 100% 100
Investment Prospects by Asset Class for 2011

Private Direct Real Estate Investments 5.93
United States/Canada United States/Canada
Europe Europe
New Exhibit 2-15 Publicly Listed Property Percentage of Your Companies or REITs Real Estate Global Portfolio in World Regions Publicly Listed Equities bar chart similar to 1-3
Investment-Grade Bonds Commercial MortgageBacked Securities Publicly Listed Homebuilders
5.25
5.03
Asia Paci Asia Pacificc
4.73
Latin America Latin America
4.26
Other Other
3.93 1 Absymal 5 Fair 9 Excellent
Source: Emerging Trends in Real Estate 2011 survey.
They have a strong advantage because of their reasonably leveraged balance sheets, as well as good access to capital through the public markets and lenders, which are attracted to steady, core-style cash flows. Unlike many private owners, they can keep up capital improvements and retain or lure new tenants with enticing concession packages. Plenty of dry powder also affords them the opportunity to cash in on accretive acquisitions at or near market bottom. Theyre helping push down cap rates, especially in apartments. In a cashflow world, REITs have a very good story. Theyve already recapped and pay meaningful dividends. Its the appeal of a hard asset plus liquidity. Some investors turn off to the stock groups volatility (greater than internet startups), exacerbated by hedge funds shorting commercial real estate, and pricing run-ups since the second half of 2009, which get well ahead of property fundamentals. The debate over whether REITs act more like stocks or private real estate probably is over. The answer is stocks, but the REIT sector has also comfortably outperformed the stock market on various benchmarks. Initial public offering (IPO) activity is a mixed bag: some private firms want to go public to recapitalize more quickly, while other developers and operators with capital problems find it easier to merge into existing REITs than jump through the hoops of public offerings.
Private REITs, High-Net-Worth Investors, Local Operators

Private REIT managers want strong cash flows and have been aggressive on cap rates, buying core properties. Raising capital from mom-and-pop investors presents challenges in the face of doom-and-gloom headlines about real estate in newspapers and on websites. Ultraprivate, high-net-worth investors pursue core and opportunistic strategies with plenty of cash on hand from family fortunes. These savvy players know a good time to step up activity when they see it. Local developers and ownersproverbial market sharpshootersalso look to time the market, but their ability to move forward depends on access to strong capital partners because financing has been curtailed from local and regional banks.
Pension Funds
After going off course in a splurge of precrash opportunistic investing, pension funds remember why they were attracted to real estate in the first place nearly 40 years agothey need stable income to pay off beneficiaries. Resigned to losses from 2005 to 2007; that money is gone. [Plan sponsors] move Emerging Trends in Real Estate 2011 23
ExhIBIT 2-16
Total Expected Returns in 2011

Return NCREIF Total Return (core, unleveraged return) NAREIT Total Return Index
Source: Emerging Trends in Real Estate 2011 survey. Note: Based on average of U.S. respondents only.
7.48% 8.17%
forward instead of shirking the asset class like some did in the early 1990s. Real estate matches well with their liabilities: 5 to 6 percent cash flow rates, diversification, and an inflation hedge amount to a beautiful thing. As expectations are readjusted, most new pension investments flow into core properties for lower risk and strong income, as well as less angst. I learned life is too short, says a public pension executive. I get paid as much for achieving solid 8 percent returns through core as making bigger returns on opportunistic strategies without the higher risk of losing my job if I bomb. A minority of plan sponsors double down, looking for opportunity returns to make up for large shortfalls after recent losses. The problem getting back to core is that not many investment managers can do core strategies. They do not have the scale or service platforms to manage large portfolios of properties on an ongoing basis. Value-add and opportunity managers typically form joint ventures with operating partners, use plenty of leverage, and count on quick turnover in spiking markets. They are not attracted to core funds lower margins (no promotes) and asset managementintensive business models (higher costs). Interviewees predict a significant adviser shakeout coming: some opportunity managers and new players attempt to enter the core arena, rump performers go out of business, and certain investment banks exit.
n Expect Canadians to step up activity. Their tight markets limit new investment opportunities; the action for them will be south of the border. n German institutional investors jumped early into top-tier markets, but they become frustrated because more bidders drive up prices, and some retreat despite pressure to place more money. Secondary and tertiary markets are off-limits: Were not going there. n Germans and other Europeans typically steer clear of apartments. Theyre not familiar or comfortable with fourstory sticks-and-bricks projects. They question construction quality and do not like the short lease durations. n The unsteady U.S. economy and the value of the dollar raise more concerns than usual about currency exchange risk for Eurozone investors. n Australian and Irish investors have disappeared temporarily. They overleveraged, bought at the top of the market, and now lick their wounds. n You see more Spanish, French, and Italian high-net-worth money competing for deals, as well as Russian entrepreneurs. n Middle East investors remain plentiful, but stay under the radar using U.S. straw men to do business. They like anonymity; its difficult to tell how much they are doing. n Far East investors and sovereign wealth funds also look for opportunities. The mainland Chinese start to become more of a force.
ExhIBIT 2-17
Foreign Net Real Estate Investments in the United States

2000 $2,000 1500 $1,500 1000 $1,000
$500 500 0 0 Middle East $500 -500 Canada $1,000 -1000 Asia United Kingdom Europe (except Germany)
Foreign Investors
Global dollars looking for income returns will continue to gravitate to U.S. real estate in 2011. Were still viewed as the most stable market. Overseas investors tend to be long-term holders, who like the United States for parking money as a safe haven. It is pretty much the same old story: they concentrate on the familiar brand-name coastal cities with direct airline stops from foreign capitals and business centers. Offshore buyers have been in the thick of bidding on office buildings in New York City, Washington, D.C., San Francisco, and southern California. They like to invest in the cities they see back home on TV shows and at the movies. Besides downtown office property, they like retail and hotels (needing a place to stay on visits), and some consider industrial properties at primary seaports. highlights of interviewee comments about foreign capital flows include: 24 Emerging Trends in Real Estate 2011
Millions of Dollars
Exhibit 2-11 Foreign Net Real E Investments Exhibit 2-10
Americas
Source: Real Capital Analytics. Note: Net capital flows from second-quarter 2009 through second-quarter 2010.
Germany
Australia
Other
ExhIBIT 2-18
Foreign Net Real Estate Investments in the United States by Property Type
$1,000 1000 $800 800 $600 600 $400 400 $200 200
Millions of Dollars
n Apartment n Industrial n Office n Retail n Hotel
Canada
Asia
Americas
Middle East
Other
Australia
$200 -200 $400 -400 $600 -600
Europe (except Germany)
United Kingdom
Germany
ExhIBIT 2-19
U.S. Buyers and Sellers: Net Capital Flows by Source and Property Sector
$800 800 $600 600 $400 400
Total (Millions of Dollars)
Exhibit 2 Net Capi Property Exhibit 2

Dollars
$200 200
00
Cross-Border Cross-Border Cross-Border Cross-Border Equity Fund Equity Fund Equity Fund Equity Fund Institutional Institutional Institutional Institutional User/other User/other User/other User/other Unknown Unknown Unknown Unknown
Private
Private
Private
Private
$200 -200 $400 -400 $600 -600 $800 -800 $1,000 -1000
Public
Public
Public
Apartment
Industrial
Office
Retail
Public
25
26
c h a p t e r
Markets toWatch
Gateway 24-hour cities will always secondary markets.
conomic doldrums bring the reality of the nations real estate markets into sharper relief, dominant institutional buyers concentrate on only eight or nine markets, and investors question the future of some secondary and tertiary metropolitan areas. If big corporate space users are any guide, theyre focusing on the places where they need to be, says a leading tenant rep. They want the global gateway cities for headquarters and lower-cost Sunbelt cities with international airport access for back office. Strategically, they eliminate most everything else. Those cities left out will depend increasingly on government facilities, health care complexes, and education centers to secure economic prospects. Accessibility and workforce are key. Its the yin and yang of links to global pathwaysbig airports, good labor pools, and company operations centers. Other interviewees suggest investors should follow where educated, energetic, creative young people want to be. Inevitably, that path leads to the same group of highly favored metropolitan areas with 24-hour attributes.
dominate and outshine

ratings improved over 2010s results for markets from coast to coast, the gap between top and bottom continues to widen, and more than 50 percent of surveyed cities still fall below fair ratings for commercial/multifamily investment prospects. If you look market by market, you see some winners and more losers.
The Pittsburgh Scenario. Were going to see a lot more

places end up like Pittsburgh, if theyre lucky, says a senior investment executive. Heres a city that used to be a major manufacturing center with many corporate headquarters. Now its cleaned up, the high-paying factory jobs have diminished dramatically, and a high ratio of workers have government or quasi-government jobs in education and medical fields. Forbes magazine ranked it as Americas most livable city in 2010. However, Property values and rents have essentially been flat and development has been sporadic. Pittsburgh ranks near the bottom on Emerging Trends surveys for investment and development prospects. Adds another interviewee, Pittsburgh is a tight market, but stagnant. You can get decent, steady returns without much, if any, upside. And in the Era of Less, modest, boring income returns should become more expected, accepted, and necessarily embraced in more markets.
No Surprises, Gaps Remain

Top Emerging Trends markets offer no surprises: Washington, D.C., and New York City pull away from the pack, followed by San Francisco, Boston, and Seattle. All qualify as preeminent gateway cities with attractive coastal (or near-coast) locations, barriers to entry, superior transportation hubs linked directly to global business centers, and concentrations of brainpower jobs. Houston and Denver also solidify rankings near the top, and respondents show faith in southern Californias resilience, despite recent setbacks. While
Better to No Prospects. Interviewees contend traditional interior, hot-growth cities can bounce back faster than many observers think, thanks to lower business costs and airports; Houston, Denver, and Dallas rate frequent mentions. Atlanta, another typically favored fast-growth center, draws less enthusiasm this year, despite its preeminent airport. Concerns grow
Emerging Trends in Real Estate 2011 27
ExHIBIT 3-1
U.S. Markets to Watch: Commercial/Multifamily Investment

Washington, D.C.otgnihs n, D.C. Wa San FranciscorF ancisco San AustinAustin BostonBoston SeattleSeat le San JoseaS n Jose HoustonHouston New Yorkw York Ne 7.01 6.56 6.34 6.29 6.20 6.09 6.08 6.02 5.84 5.63 5.58 5.50 5.45 5.42 5.39 5.30 5.20 1 Abysmal 5 Fair 9 Excellent Westchester/Fairfield, CT
San Diego Denver Denver Dal as/Fort Worth Dallas/Fort Worth Northern New Jersey Northern New Jersey Orange County, CA Orange County, CA San Antonio San AntoniolroP t and, OR Portland, ORD/hgilaR e urham
San Diego Raleigh/Durham
Los Los AngelesAngeles
Westchester/Fairfield, CT Chicago Salt Lake City Salt Lake City Baltimore Baltimore Minneapolis/St. Paul Min eapolis/St. Paul Charlotte Charlot e Orlando Orlando Philadelphia Philadelphia NashvilleelvhsaN i Miamiim Mia Honolulu/HawaiiiawaH/llono u u H Tampa/St. PetersburggrubsrteP.S/ap t e Tam Virginia Beach/Norfolkklfor o Virginia Beach/N AtlantaatnatA l Inland Empire,InlandCA Empire, CA PhoenixxineohP JacksonvilleelvnoskcaJ i
Chicago
5.18 5.14 4.93 4.88 4.85 4.82 4.58 4.53 4.51 4.49 4.43 4.41 4.32 4.32 4.11 4.10 4.03 1 Abysmal 5 Fair 9 Excellent
Sacramento Albuquerque Kansas City Kansas City Indianapolis Indianapolis Oklahoma City Oklahoma City Tucson Tucson New Orleans New Orleans St. Louis St. Louis Las VegaseV gas Las ProvidenceedivorP nce PittsburghubstPi rgh CincinnatinicniC ati Milwaukeeuawl ke Mi Memphisphis Mem Columbusbus Colum ClevelandlevelC and DetroiteD troit
Albuquerque 1 Abysmal
Sacramento
3.99 3.95 3.84 3.82 3.74 3.72 3.54 3.45 3.44 3.44 3.43 3.25 3.25 3.22 3.14 2.65 2.00 5 Fair 9 Excellent
ExHIBIT 3-2
U.S. Markets to Watch: Commercial/Multifamily Development

Washington, D.C. Washington, D.C. New York New York Austin Austin San Francisco San Francisco
5.59 4.82 4.63 4.55 4.54 4.46 4.23 4.19 4.17 4.16 4.13 4.09 4.03 3.99 3.96 3.90 3.66 1 2 3 1 Abysmal
4
Dallas/Fort Worth Orange County, CA Baltimore Philadelphia Nashville Honolulu/Hawaii Charlotte Minneapolis/St. Paul Chicago Albuquerque Virginia Beach/Norfolk Orlando Oklahoma City Tampa/St. Petersburg New Orleans Providence Pittsburgh 1 Abysmal
3.64 3.58 3.53 3.52 3.48 3.39 3.36 3.33 3.33 3.24 3.20 3.07 3.05 3.01 3.00 2.97 2.85 5 Fair 9 Excellent
Inland Empire, CA
Miami Miami Jacksonvil e Jacksonville Indianapolis Indianapolis Kansas Ci Kansasty City Columbus Columbus
Inland Empire, CA
2.84 2.80 2.78 2.70 2.65 2.63 2.54 2.54 2.53 2.49 2.43 2.43 2.42 2.33 2.17 2.04 1.59 1 5 Fair 9 Excellent
San Jose San Jose Boston Boston Seattle Seattle Houston Houston LosLos Angeles Angeles Raleigh/Durham Raleigh/Durham Westchester/Fairfield,CTCT Westchester/Fair eld, Northern New Jersey Northern New Jersey Portland, OR San Diego
San Diego Portland, OR
Tucson Tucson Sacramento Sacramento Memphis Memphis Atlanta Atlanta Cincinnati Milwaukee St. Louis Phoenix Cleveland Las Vegas
Las Vegas Cleveland Phoenix St. Louis Milwaukee Cincinnati
0 1 2 3 4 5 6 7 8
Denver
Denver
San Antonio Salt Lake City

Salt Lake City 0 San Antonio
Detroit
0.0 0.5 1.0Abysmal2.5 3.0 1.5 2.0
55 Fair
9 Excellent
Detroit
0 1 2 3 4 5 6 7 8
28
Chapter 3: Markets to Watch
ExHIBIT 3-3
U.S. Markets to Watch: For-Sale Homebuilding

Washington, D.C. Washington, D.C. Austin Austin New York New York Houston Houston San Francisco
San Francisco San Jose Boston
5.86 5.39 5.33 5.00 4.82 4.78 4.57 4.53 4.52 4.49 4.41 4.35 4.28 4.28 4.25 4.16 4.13 1 Abysmal
2
OrangeCounty, CA CA Orange County, Charlotte Charlotte Salt Lake City Minneapolis/St. Paul Honolulu/Hawaii
Honolulu/Hawaii Baltimore Orlando Minneapolis/St. Paul Salt Lake City
4.08 3.92 3.80 3.73 3.72 3.71 3.66 3.55 3.53 3.50 3.49 3.40 3.29 3.22 3.22 3.11 3.06
4
Indianapolis Inland Empire, CA Pittsburgh Miami New Orleans Tucson Atlanta Phoenix Columbus Sacramento St. Louis Memphis Milwaukee Cincinnati Las Vegas Cleveland Detroit 9 Excellent 1 Abysmal
3.00 2.97 2.94 2.94 2.92 2.90 2.87 2.87 2.76 2.69 2.65 2.62 2.58 2.47 2.41 2.36 1.63 5 Fair 9 Excellent
Philadelphia Philadelphia
Boston
San Jose
Baltimore Orlando Chicago
Northern New Jersey

Northern New Jersey
San Antonio
San Antonio
Raleigh/Durham
Raleigh/Durham
Virginia Beach/Norfolk
Virginia Beach/Norfolk
Chicago
Los Angeles
Nashville
Los Angeles Dallas/Fort Worth Dallas/Fort Worth Seattle Seattle Westchester/Fairfield, CT
Nashville Albuquerque Albuquerque Oklahoma City Oklahoma City Tampa/St. Petersburg Tampa/St. Jacksonville Petersburg
San CT Westchester/Fair eld,Diego Portland, OR San Diego Denver Portland, OR

Denver 0 1 3 4
Kansas Jacksonville City Providence Kansas City

Providence 0
5 Fair
5
9 Excellent
1 1 Abysmal 2 3
5 Fair 5
about oversupply and inadequate road, transit, and water infrastructure. Overall, respondents remain negative about housing-bust markets in Florida and in the desert Southwest. And the Midwests slow- to no-growth metro areas draw virtually no attention. Many secondary cities and most tertiary markets just do not appear on investor radar screens. You see no demand, no capital, and no interest. Theres no near-term growth in office or retail and no need for new development. Local operators disagree, managing assets as long-term holds and focusing on owning the best properties in their markets. Inevitably, investor appetites will extend beyond the safest, major markets as economic recovery gains traction.
ers have no choice but to raise taxes and cut services in already high-cost environments. Mass transit faces cutbacks while even police and fire protection and sanitation cannot escape the budget knife. Every place has negative issues, municipal risk over possible defaults is a growing concern, and people will move away to lower-cost places. Twenty-four-hour cities rebounded in the 1990s when crime rates came down and streets got cleaner. Shrinking coffers signal trouble and possible regression if quality of life in these premium locations suffers significantly.
that doesnt compute, and for commercial owners, larger tax bites crimp bottom lines even further. Interviewees point to real estate taxes mushrooming well ahead of inflation, but the problems are hard to fix. With federal stimulus funds running out, politicians look to avoid voter backlash. Well see more consolidations among local governments, more government-worker layoffs, outsourcing to private companies at lower wages, and pressure to reduce public pensions. It all adds up to more job losses and could put more downward pressure on living standards.
Rising Taxes, More Layoffs. Governments and taxpayers in places where property prices have declined significantly confront even greater challenges. Local officials squirm over raising property and sales taxes after real estate values dive. For the average taxpayer,
Budget Cuts. The nasty economy raises yellow flags for even dominant 24-hour markets. States and cities wallow in red ink; government lead-
Infill Gains over Suburbs. Some interviewees suggest higher taxes in cities and urbanizing suburbs could stall the trend of people returning to these higher-cost areas. But the overall residential tide is moving from fringe suburbs to urbanizing suburban nodes, and 24-hour downtown cores
Emerging Trends in Real Estate 2011 29
Edmonton
ExHIBIT 3-4
Leading U.S./Canadian Cities

Investment Prospects Development Prospects
Vancouver Seattle
Calgary
n Very Good n Good n Modestly Good n Fair n Modestly Poor n Poor n Very Poor n Abysmal
Portland
Sacramento San Francisco San Jose Las Vegas Los Angeles Orange County San Diego Honolulu Tucson Salt Lake City Denver
Inland Empire Phoenix
Albuquerque Oklahoma City Dallas/ Fort Worth Austin San Antonio Houston
30
Montreal Minneapolis/ St. Paul Milwaukee Chicago Indianapolis Kansas City St. Louis Charlotte Atlanta Columbus Cincinnati Ottawa Toronto Boston Detroit Cleveland Northern New Jersey Pittsburgh Baltimore Washington, D.C. Virginia Beach/Norfolk Nashville Memphis Raleigh/ Durham Providence New York City Philadelphia
Halifax
Westchester/Fairfield
Jacksonville New Orleans Orlando Tampa/ St. Petersburg Miami
31
San Francisco San Francisco Los Angeles Infrastructure Neglect. Economic Los Angeles travail and government deficits distract New York New York attention from dealing with the nations Washington, D.C. archaic and deteriorating infrastruc- Washington, D.C. ture. Twentieth-century interstates and Seattle Seattle insufficient mass-transit systems can Denver Denver no longer support population growth San Diego and commerce in many increasingly San Diego clogged metropolitan areas. Newer Boston Boston Sunbelt cities, developed through road Houston Houston and highway grids, strangle in congestion while older 24-hour metro areas Chicago Chicago desperately need to replace crumbling Dallas Dallas bridges, overpasses, and tunnels. Water and sewage-treatment systems Miami Miami in many places age into inadequacy, Philadelphia Philadelphia while the nations power grid dates to Phoenix New Deal days. Financing a makeover Phoenix will cost trillions of dollars over the next Atlanta Atlanta three decadesmoney the country does not have or does not want to spend. At some point, governments will be forced to institute various user 32
appear to gain momentum for other economic reasons. You just can live more efficiently with less environmental impact in infill areas, says a developer. Bigger houses cost more to maintain, car expenses increase, and time lost in traffic and commuting mount. As a result, apartment and townhouse living near stores and attractions gains favor with aging, downsizing babyboomer parents, and their children want stimulating environments in more urban places. Subdivision-styled suburbs will not disappear, and schools will continue to be drivers in parent decisions of where to raise families. But where are schools heading? Will it matter as much where you are in the future? Will kids join classes from remote locations via computers and the internet and be taught by super teachers over the web? It wont necessarily be the same. Some cities make strides in improving public schools and providing charter-school alternatives, while certain suburban districts falter under shrinking tax bases.
fees and infrastructure taxes to pay for essential transport upgrades and new systems, including high-speed rail, light rail, subways, and airports. Eventual decisions and costs related to infrastructure could force monumental changes in where people choose to live and work.
8 7 6 5 4 3
7.0
Washington, D.C.
Major Market Review

Washington, D.C. Never far from the
top, the nations capital will hold on to its number-one Emerging Trends ranking as long as the economy labors. The federal government never downsizes, while lobbyists and consultants swarm legislators and agencies hoping to influence or
ExHIBIT 3-5
2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
stop regulatory changes. All the activity cushions property markets and attracts investors. Its a great long-term hold.
U.S. Apartment Buy/Hold/Sell Recommendations by Metro Area

n Buy n Hold n Sell
75.0 73.2 72.6 69.0 67.6 66.3 65.6 63.2 52.7 50.6 47.0 38.2 34.3 31.6 29.5 39.5 43.7 36.7 45.9 29.7 36.1 29.4
15.6 18.7 21.0 21.0 26.4 24.2 21.8 28.7
9.3 8.0 6.3 10.0 5.8 9.4 12.5 8.0 17.5 13.2 23.5 22.2 21.8 31.6 24.4
0%
10%
20
20%
30%
40
40%
60
50%
60%
80
70%
80%
100
90%
120
100%
Values stayed within 10 percent of peak, so owners and lenders suffered less pain, and no market benefits more from core buyers recent flight to quality, driving prices back up. But interviewees warn the window for acquisitions has closed. Pricing has been driven by false positives, too much money, and not enough fundamentals. In the survey, the District and environs also rank as the top development and homebuilding market, the top retail buy location, the third-best buy for office and hotels, and fourth best for apartments.
New York City. Who says bailouts and stimulus dont work? Troubled Assets Relief Program (TARP) and Fed funds directed at banks helped markets with financial services businesses and eased job cuts, benefiting New York City, which shows the biggest ratings jump in the survey over last year. Foreign investors remain active, boosting market liquidity, and lenders loosen purse strings for owners of trophy office space. You can get positive leverage on cheap debt. But sudden cap-rate compression looks overdone, raising concerns of a forming pricing bubblette. Tenants move to lock in rents before landlords get any pricing power: They realize the market has turned. Office owners pull back on concessions
as rents trend up with more shadow space absorbed. Higher taxes to deal with budget shortfalls raise more shrugs than concerns from locals. Everyone knows this is an expensive place to operate from, but they need to be here. Apartment rents rebound along with coop/condo prices, which registered only minor drops in the choicest neighborhoods, and retailers begin to fill in gaps in empty streetscape storefronts. New hotel completions could temper a recovery in occupancies and room rates, but tourists and business travelers are back in droves. Suburban markets generally lag well behind Manhattan; some catch-up will occur in 2011. The large northern New Jersey industrial market also strengthens with net absorption gains.
help attract brainpower, and sustain expensive regional living standards. Finance, international trade, and tourism further diversify an estimable business base. Office vacancies need to track down from the midteens, and veteran investors complain that current office rents stand about where they were in the 1980s. Youve got to be a market timer to take advantage of boom/ bust rent spikes. High for-sale housing costs make apartments an extremely desirable investment. Hotel occupancies improve and revenue per available room (RevPAR) should follow. San Jose struggles with oversupply, especially of new condos.
San Francisco. The countrys most volatile 24-hour market, the City by the Bay now offers investors excellent nearmarket-bottom buying opportunities, particularly in apartments and hotels (ET survey number-one buy), office (ET number two), and retail (ET number three). The market also sidesteps some of its states fiscal mess, performing better than southern California. Tech and life science industries flourish around top-flight universities (Stanford, University of CaliforniaBerkeley),
Boston. This venerable 24-hour city registers high marks for livability, controlled development, and a highly educated labor force, but lacks economic vibrancy. So join the club: thats the case for most markets after D.C. and New York City. Office rents did not precipitously drop off precrash 2007 highs, but remain well below 2000 peaks, and local brokers predict only a slight turnaround in 2011. Apartment rents will track back upexpensive for-sale housing keeps tenant demand high for multifamily unitsand hotels show life. For the future, Boston should offer steady core returns with enough
8 7 6 5 4 3 2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
8 7
8 7
6.6
6 5 4 3
6.3
6 5
6.2
Boston
San Francisco
4 3 2 1
New York
2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
'94 '96 '98 '00 '02 '04 '06 '08 '10 '11
33
ExHIBIT 3-6
U.S. Industrial/Distribution Property Buy/Hold/Sell Recommendations by Metro Area

n Buy n Hold n Sell
Los Angeles Dallas Houston Miami Seattle Washington, D.C. San Francisco Chicago Denver San Diego New York Boston Phoenix Atlanta Philadelphia
63.4 56.6 52.1 52.1 51.1 48.8 48.6 46.1 44.1 38.8 37.8 31.1 26.2 21.9 20.4 48.8 52.1 53.1 56.8 33.7 40.9 36.6 44.6 37.2 41.9 39.3 48.8 47.5 52.7
28.6
8.0 9.6 7.0 11.3 4.4 14.0 9.5 14.6 7.1 13.8 9.5 12.2 25.0 26.0 26.5
20
40
60
80
100
sustained buyer interest to bolster values and provide decent appreciation potential. It wont knock your sox off, but scores of colleges and universities, including Harvard and the Massachusetts Institute of Technology, establish the area as one of the worlds preeminent knowledge centers. That is nothing to sell short.
8 7 6 5 4 3
so perimeter areas find themselves increasingly left off the job growth path. Major employers like Amazon and Boeing seem more upbeat, but its hard to see the economic drivers. Microsoft is still right-sizing, and the state is broke: tax increases and service cuts, including public employee layoffs, lie ahead. The ability to push rents will be more limited in the future. Despite vacancies in the upper teens after an ill-timed development spurt, office rents have held up, thanks to generous tenant improvement packages and what amounts to years in free rent. Returns are abysmal. Overbuilt high-rise condominiums near downtown sit empty or half empty; developers take a bruising. Even with all the high-tech millionaires spawned locally, just so many people around here can afford $1 million apartments. Industrial markets firm up at the bottom: the Puget Sound will continue to solidify its position as one of the nations most important shipping hubs. Lackluster retail space does better, and apartment rents begin to increase with new arrivals filling units and construction languishing. Weve had the lowest delivery rates since the 120 1960s. Housing prices fell as much as 30 percent off record highs, but now prices tack back within more rational 15-year trend lines. Place your bets on locations closer to the core.
6.1
Houston. Out-of-towners dont get it:

this city is hard to figure out. We have no zoning, growth in all directions, and no barriers to entry. But market-timing developers always do well, and investors can achieve solid returns. Jobs will always be here. Intellectual capital and talent in the global energy business concentrate in the city, the de-facto world oil and gas business capital, and Houston has one of the countrys premier medical centers. NASAs downsizing plans and Continental Airlines merger with United Airlines
Seattle
Seattle. Crawling out, but running on

empty, Seattle gets a boost from inmigration to the area, gaining 160,000 residents since the recession. Young workers attracted to tech firms want 24-hour lifestyles near where they work. Big employers shift offices from suburban campuses to more infill locations, 34 Emerging Trends in Real Estate 2011
2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
8 7 6 5 4 3 2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
6.0
Houston
take the edge off office tenant demand. retailed markets, southern Californias Nevertheless, downtowns vacancy endless shopping strips may take the rate in the low teens stands below the cake; a shakeout is underway. For all national average. The increasingly strategic port expands in preparaExHIBIT 3-7 tion for augmented shipping traffic U.S. Office Buy/Hold/Sell Recommendations by Metro Area from the Pacific through the widened Panama Canal, scheduled for 2014. n Buy n Hold n Sell Population inflows help keep apartment occupancies up. Interviewees like the New 64.9 26.8 8.3 business-friendly Texas government New York York and low taxes (no state income tax). San Francisco 62.5 29.4 8.1 San Francisco We should come out stronger from the Washington, 23.9 13.7 Washington, D.C. D.C. 62.3 recession than most other states, which creates more demand for real estate. Boston 55.8 42.2 2.0 Boston Not unexpectedly, developers get Los Angeles 45.2 41.3 13.5 Los ready to pick up any slack. Build and Angeles Houston 44.8 37.9 17.2 sell quickly always makes for a good Houston strategy in recovery. In Texas, builders Seattle 39.3 52.3 8.4 Seattle can count on great demand, but over San 35.6 51.1 13.3 time, rents dont do well because of San DiegoDiego the constant new supply. Dallas 35.1 53.2 11.70
to entry, and large differentials in cost of living between housing and rentals keep apartment occupancies and rents high. Rebounding import/export activity lifts the outlook for distribution space serving the nations largest port, encompassing Los AngelesLong Beach. Industrials definitely head in the right direction. Expected slow employment growth will not quickly absorb office vacancies, which average in the mid- to high teens areawide. Orange County looks especially soft: mainstay mortgage bankers and brokerage firms hit the skids in the housing bust. The closer to the coast, the better for investors: a housing free fall crushes areas around the Inland Empire and east of Interstate 5. Among the nations over-
8 7 6 5 4 3 2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
5.8
Los Angeles
Dallas Denver Denver Los Angeles. Emerging Trends interviewees dump on Californias high Chicago Chicago taxes and antibusiness environment MiamiMiami the state government is a messbut Phoenix also realize the good opportunity to Phoenix invest at insanely low values and ride Philadelphia Philadelphia out the storm. And who wants to bet Atlanta southern California does not bounce Atlanta
back faster than many other markets? Its an amazing place for multifamily: huge immigrant flows, high barriers
34.3 23.6 21.1 20.6 17.7 14.3 54.9 55.3 39.1 48.4 50.0
56.6
9.1 21.6 23.7 40.2 33.9 35.7
20
40
60
80
100
35
120
8 7 6 5 4 3 2 1 0
8 7
8 7
5.6
6 5 4 3 2
5.6
6 5
5.5
Denver
4 3 2 1
Dallas/Fort Worth
San Diego
'94 '96 '98 '00 '02 '04 '06 '08 '10 '11
1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
'94 '96 '98 '00 '02 '04 '06 '08 '10 '11
the negatives involving government gridlock and high cost of living, people still want to live here. And dont forget that southern California remains the countrys most important gateway to the Pacific Rim and Latin America.
retail front, put a hold on any more lifestyle centers.
San Diego. Ditto, ditto, ditto. San

Diegos story largely copies that of Los Angeles. These two markets, not surprisingly, can track closely together. But San Diego does not rate L.A.s gateway status, lacking a major port or international airport hub like LAx. Traditionally, the local economy creates startup jobs, but doesnt retain headquarters. When companies get large, they leave. For global and domestic business, the city sits just outside primary jet ways, making travel a pain. As is the case everywhere else in southern California, housing prices have dropped from stratospheric levels, savaging mortgage holders. In particular, downtown condos are badly oversupplied. Demand builds back for housing in better neighborhoods: more buyers with cash want to take advantage of market bottom near Pacific coastlines. Whats not to like about arguably the countrys most desirable climate? Public-company homebuilders buy relatively cheap residential land to prepare for an eventual upturn. On the wobbly 36 Emerging Trends in Real Estate 2011
Denver. The city makes progress positioning for 21st-century growth by strengthening its downtown core through a new light-rail and railroad hub to serve surrounding suburban nodes. As a result, the central business district becomes the place to be, and mixed-use, transit-oriented development helps anchor suburban districts. This metro area also has one of the nations most modern airports, an attractive Rocky Mountain backdrop, relatively low business taxes, and a broad-based economy anchored by oil and gas, alternative energy, and defense companies. We can weather the storm better than most, and quality-of-life attributes will continue to attract people. In fact, the office market has stabilized, with overall vacancies in the mid- to high teens, and larger blocks of space are (relatively) scarce. But it remains very much a tenants market for users of smaller space: 10,000 square feet and below is a sweet spot for making deals. Apartment owners should see vacancies decline and rents tick up. Dallas. Local developers learned from
hard experience in the early 1990s not to take out recourse loans, and housing
prices never got out of control in the recent cycle. The recession was not nearly as devastating here, and were better off, but everything is soft. Dallas is always about strong demand and even bigger supply. Every developer on the continent has an office there, so the market always has too much space. Companies like low costs, low taxes, and a sizable labor pool attracted to an area with an affordable cost of living. You see many companies moving operations from the West Coast, getting away from a highexpense environment. Office vacancies have not dipped below 20 percent in more than a decade; perhaps with relatively tempered construction today, they have a shot to drop into the high teens over the next few years. Industrial space seems okay, but never does well for long, once construction starts in earnest. Retail is more of the same: been bad for a long time. Apartment builders can do well, constructing into growth waves, but investors in existing properties always face new competition. Dallas/Fort Worth International Airport remains this markets greatest asset, ensuring that Dallas remains an important intersection for global commerce.
Chicago. Were struggling. Twentyfour-hour dynamics and OHare
Philadelphia. Interviewees lament how

8 7 6 5 4 3 2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
Chicago
5.1
this city suffers from its proximity to New York, but others hope for gains from positioning as a cheaper alternative. A bounty of superior colleges and universities anchors an attractive labor pool. More kids going to school there stay after graduation. If only high-speed railtraveling 150 miles per hourcould be developed to link with Manhattan, the city might get a major boost. Midteens office vacancy rates compare favorably with other cities, and locals tout the good multifamily market. But institutional investors never muster much enthusiasm for the overall scene.
8 7 6 5 4 3 2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
4.5
Philadelphia
International Airport help maintain the city as an important interior U.S. gateway, but the ebbing fortunes of Midwest industries and slowing regionwide demographic trends diminish chances for a robust recovery. Only downtown Class A office space holds its own; the overall market rents have fluctuated anemically in the mid- to low $20s for years as developers keep building new upscale towers despite relatively weak growth. Tomorrow has come to the suburbs, where vacancies, including shadow space, approach 30 percent. Negative effective rents head lower as landlords try to stanch the bleeding. Rates are likely to get worse before they get better. Most residential construction has stopped, but the condo overhang not only depresses coop/condo prices, but also holds down rents on apartments, with no recovery in sight. Retail space and hotels are overbuilt, and industrial suffers from regional manufacturing flaccidness. Locals, meanwhile, find the condition of state and municipal finances hugely troubling, weighing down the market with the likelihood of higher taxes and fewer services. And what happens after Mayor Richard Daley leaves office?
Miami. Interviewees resolutely express confidence that Florida can recover its
ExHIBIT 3-8
mojo. The overall negativity hides some real bright spots. South Florida, in particular, lures global commerce and visitors, as well as baby-boomer retirees
U.S. Retail Buy/Hold/Sell Recommendations by Metro Area

n Buy n Hold n Sell
Washington, D.C. New York San Francisco Los Angeles Boston Houston San Diego Chicago Seattle Denver Miami Dallas Philadelphia Phoenix Atlanta
50.5 48.2 41.4 36.1 31.7 29.7 29.0 27.8 27.8 23.6 23.5 23.2 19.2 17.3 10.3 58.8 45.7 49.1 56.1 56.8 59.2 61.1 60.0 61.8 57.4 59.8 55.8 48.2
40.2 38.3
9.3 13.6 12.9 14.8 12.2 13.5 11.8 11.1 12.2 14.6 19.1 17.1 25.0 34.6 30.9
37
8 7 6 5 4 3 2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
8 7 6
8 7
Atlanta
4.3
6 5 4 3 2 1
4.5
5 4 3
4.1
Phoenix
Miami
2 1 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '11
'94 '96 '98 '00 '02 '04 '06 '08 '10 '11
who gravitate to warmer climes. This market has gone through cycles before and will attract a lot of people. In fact, South Americans and Europeans look for obvious bargains among the surfeit of near-empty, beachside condo towers. Buyer demand for rental apartments actually skyrockets, boosting values in expectation of meaningful rent increases. Some multifamily submarkets enjoy sub5 percent vacancy, and landlords will be able to hike rates. Hotel occupancies and room rates have also climbed off the mat, but a moribund office market struggles with 20 percentplus vacancy rates and declining rents, and housing remains a disaster area. Locked in by the ocean and the Everglades, built-out south Florida markets will have no choice but to build up and urbanize when expected population growth resumes.
Atlanta. Never your quintessential barriers-to-entry market, the metro area suffers from overbuilding everywhere. Institutional investors hold back for now; weve taken a hit and do not compare well against gateway markets. But boosters count many positivesa temperate Sunbelt climate; a world-
class airport adding a fifth runway; the lower-cost business environment of a right-to-work state; and a bevy of excellent universities, including Emory and Georgia Tech. The trend of people moving back to the cities is also alive and well, with more empty nesters and young adults relocating into urbanizing, infill districtsnotably Midtown and Buckhead, as well as downtown neighborhoods. Were finally achieving a critical mass of in-town living, and future growth will be concentrated toward the center. Unfortunately for many underwater developers and owners, these buyers and renters have too many cheap condos and apartments from which to choose. There was too much in the pipeline when demand turned off in every property sector. State and local governments finally address traffic issues, looking to expand highways with funding from increased sales taxes. The area also needs new reservoirs to sustain future growth. Were trying to find a balance between funding infrastructure and keeping taxes down.
by deep recession. Its a double whammy and will take time to recover. Everything is priced at substantial discounts to replacement cost, and snowbirds can buy ridiculously cheap homes where you can live like a king. Local investors count on people and businesses relocating from expensive coastal areas: Were the first stop on the wagon train for people leaving California. But interviewees expect a further downdraft in office, while the important lodging industry will be hurt by the ongoing immigration imbroglio. Boycotts hit the convention business, and the areas low-cost immigrant labor pool runs for cover; a major growth driver has been curtailed. New town centers in every direction eat into mall shares. Like everywhere else, apartment rents should increase. For the longer term, the city wrestles with how to manage hoped-for growth and limited water resources.
Phoenix. This growth-based desert city must rise from the ashes of another overbuilding spree, compounded
38
ExHIBIT 3-9
U.S. Hotel Buy/Hold/Sell Recommendations by Metro Area

n Buy n Hold n Sell
San Francisco San Francisco New York NewYork Washington, Washington, D.C.D.C. San Diego San Diego Los Angeles Los Angeles Boston Boston Chicago Chicago Seattle Seattle Dallas Dallas Miami Miami Denver Denver Houston Houston Philadelphia Philadelphia Phoenix Phoenix Atlanta Atlanta
57.0 54.9 52.1 48.3 44.0 41.9 37.1 35.3 31.6 31.6 30.0 25.5 18.4 18.0 14.3 44.9 44.3 42.9 46.8 54.4 49.1 45.6 53.3 56.9 36.2 42.7 43.6
34.9 33.8 34.3
8.1 11.3 13.7 15.5 13.3 14.5 16.1 10.3 19.3 22.8 16.7 17.7 36.7 37.7 42.9
gridlock and potential state government downsizing. . . . Albuquerque will see relatively good job growth in 2011. . . . Oklahoma City benefits from reasonably high employment and the local energy business, as well as new downtown redevelopment initiatives. . . . New Sell Orleans shows some signs of life as the post-Katrina infusion of dollars provides a modest payoff. . . . Las Vegas Hold missed its bets, building too much just as the economy swooned. Competition from casinos, popping up nationwide, Buy also erodes market share. . . . Ratings for many Midwest citiesKansas City, Indianapolis, St. Louis, Cincinnati, Milwaukee, Memphis, Columbus, Cleveland, and Detroitimprove marginally, but national real estate players tend to stay away.
20
40
60
80
100
120
Other Market Prospects

Two smaller Texas markets receive relatively high ratings. Everyone wants to live in Austin, the state capital, home to a major university (hook em, Horns), and one of the few cities in the Sunbelt with growth restrictions. San Antonio rates as a good service market, but with limited rent growth potential. . . . Portland, Oregon, always gets high marks for quality of life, and its growth boundaries have encouraged a 24-hour dynamic in its downtown. . . . RaleighDurhams research triangle concentrates brainpower jobs and, like Charlotte, will
gain from continued population shifts to affordable, temperate regions. . . . Salt Lake City typically benefits when California hiccups. . . . Minneapoliss diversified economy sustains its status as the second-best real estate market in the Midwest, while a new baseball stadium and expanded light-rail system strengthen the downtown core. . . . Orlando, Tampa, and Jacksonville creep off market bottoms; the Florida housing mess tempers outlooks. . . . Job growth in Nashville will bolster this market as tourism and other sectors recover. . . . If tourist traffic resumes, Honolulu will improve. . . . Sacramento bogs down in political Emerging Trends in Real Estate 2011 39
40
c h a p t e r
Property Types
in Perspective
After apartments, its
slim pickings.
ExHIBIT 4-1
or 2011, investment and development prospects improve across all property sectors after a hard landing in 2010 (see exhibit 4-1). Hotels actually show the greatest improvement over last years dismal investment ratings, but only apartments register a good outlook. Highlighting the ongoing rush to income-producing core assets, survey respondents see modest recovery tracks for warehouses, downtown office properties, and neighborhood shopping centers, but more limited gains for malls, power centers, and especially suburban office property. Builders should take little solace from betterbut generally poor development ratings: only apartments warrant any possibility for new construction during the year, according to surveys.
Prospects for Major Commercial/Multifamily Property Types in 2011

n Investment Prospects n Development Prospects
Apartment
6.19 Major 4.85
Exhibit 4- Prospect
Industrial/Distribution
Commercial/Multif Property Types in 2 5.07 Exhibit 4-1

3.12
Prospects Improve
Holding Tenants
In general, new leasing activity will occur at substantially lower rates than precrash levels, and rents will decline on average, except for multifamily. In the immediate future, job number one is keeping properties leased and retaining tenants at almost any cost. Owners and managers must concentrate on cementing tenant relationships. Noted one interviewee: The last thing you want to do is create a situation where the tenant isnt satisfied with the building. If the tenant is happy, then you can get down to economics. More tenants renew and extend, which is good news, signaling confidence they can sustain their businesses and want to take advantage of lower rates. Expect some firming of rents in certain warehouse and downtown office markets during the year, but until then, many leasing efforts could end in land-
Hotels
4.78 2.33
Office
4.72 2.06
Retail
4.50 2.26
1 Abysmal 5 Fair 9 Excellent
41
ExHIBIT 4-2
Prospects for Commercial/Multifamily Subsectors in 2011

lord capitulation. Interviewees do not forecast upward pressure on commercial rents until 2012, and few expect spikes anytime soon. Everybody adjusts to new rental rate realities.
Slower Demand Growth

6.20 5.03 5.57 4.23 5.20 3.13 5.08 2.35 5.00 3.05 4.77 2.23 4.67 2.58 4.63 2.88 4.06 1.84 4.04 2.13 3.99 1.83
Apartment Rental: Apartment Rental: Moderate IncomeIncome Moderate Apartment Rental: Apartment Rental: High IncomeIncome High Warehouse Industrial Warehouse Industrial Central ce Central City O City Office Neigh./Community Neigh./Community Shopping Centers Centers Shopping Full-Service Full-Service Hotels Hotels Limited-Service Limited-Service Hotels Hotels R&D Industrial R&D Industrial Regional Regional Malls Malls
Exhibit 4- Prospects for Commercial/Multifamily Subsectors in 2011 Exhibit 4-1
Concerns increase over long-term demand trends. Tech advances and e-commerce affect not only retail, but also industrial and office sectors. More online shopping inevitably will reduce the number of bricks-and-mortar stores and enable more point-to-point shipping, modifying distribution models, reducing warehouse needs, and eliminating some middlemen, including certain retailers. Look what has already happened to booksellers, record stores, and movie rental outlets. Telecom and computer innovations make going to an office superfluous for more workers and enable domestic and offshore outsourcing to people operating from homes or at cheaper overseas locations. Its a scary proposition long term since we may not see nearly as much demand growth.
Demographic Positives
On the other hand, the U.S. Census Bureau predicts the population of the United States will increase by 100 million over the next 30 yearsor more than 3 million annuallynecessarily boosting overall demand for various real estate uses, albeit probably at lower space-per-capita ratios. Ultimately these increases will help absorb excess housing inventory and propel greater demand for apartments. Arguably, a more frugal population will adapt to smaller, more efficient living units in areas more convenient to work, shopping, and recreation/entertainment districts.
PowerPower Centers Centers

Suburban Suburban O ce Office
What Is Core?
Perennially higher survey ratings for apartments and industrial space reinforce interviewee contentions that these property types are the only reliable cash-flowing real estate asset categories suitable for core investors. Other sectors have more volatility than people want to admit. Class A office buildings in top gateway markets, dominant fortress malls, and prime neighborhood shopping centers in solid infill neighborhoods might also qualify as dependable core real estate. However, other property subsectors miss the cut, including commodity suburban office buildings, the average shopping center strip, the typical power center, and lower-quality regional shopping malls. Hotels never make the list: they have always been rated too volatile to fit into core portfolios.
1 Abysmal
5 Fair
9 Excellent
42
Chapter 4: Property Types in Perspective
ExHIBIT 4-3
Fits and Starts

Expected Expected Cap Rate Cap Rate Cap Rate August 2010 December 2011 Shift (Percent) (Percent) (Basis Points) 6.71 6.39 7.10 7.21 8.26 7.70 7.75 8.11 8.40 8.73 9.21 6.36 6.65 7.09 7.20 7.59 7.61 7.75 8.12 8.32 8.67 9.00 -35 +26 -1 -1 -67 -8 0 +2 -8 -6 -21
Prospects for Capitalization Rates
Property Type Apartment Rental: Moderate Income Apartment Rental: High Income Central City Office Regional Malls R&D Industrial Neigh./Community Shopping Centers Warehouse Industrial Power Centers Suburban Office Full-Service Hotels Limited-Service Hotels
Relatively short-term holding periods and profit imperatives deter some investors and corporate owners from making green enhancements. Waiting ten years for a full payback to green investment can be a turnoff. But the cost of retrofitting buildings could be repaid from energy savings, possibly aided by some form of government tax credit tied to creating new jobs. Many owners find they can game the Leadership in Energy and Environmental Design (LEED) rating system without spending too much through cosmetic changes like adding bike racks and simply changing to more energyefficient lightbulbs. But tenants become more sophisticated in identifying the window dressing. Although it is hard to quantify green benefits, when tenants see them, they recognize them and want the associated productivity, efficiency, and image enhancement. Its like buying a 25-year-old car versus a new model. On the residential side, investors and owners express more interest in reducing and managing energy costs than renters do. And so far, formaldehyde-free cabinets have not caught on in any marketing campaigns for new condos.
Cap Rates
Expected cap rate moves through year-end 2011 indicate an overall stable to downward shift as demand strengthens across most property sectors in a slow recovery (see exhibit 4-3). Not surprisingly, apartments score the lowest rates, followed by central city office, research and development industrial, neighborhood retail, and warehouse industrial. At the high end are limited-service and full-service hotels, followed by suburban office.
Mixed Use
During the building hiatus, developers also consider the future of mixed-use projects. Many stand-alone developments in car-dependent suburban areas have had problematic outcomes. For mixed-use development to work, projects must be part of larger town centers or urbanizing districts. Just building residential over retail can be difficult, but works better in infill locations. In more suburban office districts, office/hotel/ retail developments gain a significant advantage over standalone office parks. Younger professionals want walkable centers where they dont have to get into a car to have lunch or do errands, says a Sunbelt developer. Typical office parks have a commodity flavor where its hard to distinguish between them. Probably the most significant mixed-use trend involves building more mid- and high-rise residential around established regional shopping centers, as well as incorporating office space and hotels. What were billed in the 1970s and 1980s as Americas new town centers finally transform into pedestrian-friendly urban cores.
More Green
While office developers and owners hunker down, they come to accept that sustainable building concepts will become standard in next-generation projects and that many existing buildings will need to increase efficiencies and retrofit new systems in order to compete effectively. Green is here to stay since large corporations and government operations now demand it and more cities build requirements into local codes. Every owner needs to be on top of the issue. If its a green versus brown building, green has the edge. For now, many overstretched landlords with compromised asset structures cannot afford to address green issues, and most tenants, looking for rent concessions, will not pay more for sustainable systems even though they want them. Over the next five to ten years, green will turn into a major trend, says a developer. The math and savings achieved will start to make sense and bring landlords and tenants together, with government regulations forcing the issue.
43
ExHIBIT 4-4
U.S. Apartment Investment Prospect Trends

8 8
Apartments
Strengths
Everybody loves low beta apartmentsthe safest bet Apartment Rental: High Income through the cycle. Once the province of sleazy syndicators, multifamily investments morph into the new gold standard for Apartment Rental: Moderate Income stars begin to institutional property portfolios. All the Exhibit Severely Apartment align. 4- U.S. constrained recent development plus pent-up Investment Prospect Trends demand from the burgeoning young-adult population cohort Exhibit 4-6 2004 and busted homeowners back in the rental market add up to lowered vacancies and eventual rent hikes. You sense improving fundamentals with legs at least to mid-decade. In addition, Fannie Mae and Freddie Mac effectively subsidize financing. Ready leverage at or near market bottom could turbocharge returns in the up cycle. Theres no way youd pay [current] prices without low rates and available financing. For the longer term, apartments appear well positioned to adjust rents quickly if inflation kicks in.
Apartment Rental: Moderate Income Apartment Rental: High Income
7 7
Rating
6 6
5 5
4 4
2004
2005
2006
2007
2008
2009
2010
2011
4 = modestly poor, 5 = fair, 6 = modestly good, 7 = good.

Source: Emerging Trends in Real Estate surveys.
Weaknesses
Swelling demand in the flight to core real estate compresses apartment cap rates to uncomfortably low levelsdown 200 basis points in some markets. Anything top quality gets people frenzied. Interviewees worry prices have increased too much too soon, and cap rates could back up, especially for high-income apartments in markets where more condos
ExHIBIt 4-5
U.S. Moderate-Income Apartments

2011 Investment Prospects Development Prospects Prospects Modestly Good Fair Rating 6.20 5.03 6.4% Hold 28.6% Sell 11.6% Ranking 1st 1st
Expected Capitalization Rate, December 2010 Buy 59.8%

Source: Emerging Trends in Real Estate 2011 survey. Note: Based on U.S. responses only.
ExHIBIt 4-7
U.S. Multifamily Completions and Vacancy Rates Exhibit 4- U.S.

Moderate-Income Apartments Exhibit 4-4 n Completions Vacancy
Rate %
8 9
250 250
Vacanc
Completions (thousands of Units)
ExHIBIt 4-6
200 200 150 150 100 100 50 50
7
Vacancy Rate %
Comple
U.S. High-Income Apartments

2011 Investment Prospects Development Prospects Prospects Modestly Good Modestly Poor Rating 5.57 4.23 6.6% Sell 18.8% Ranking 2nd 2nd
6
5
Expected Capitalization Rate, December 2010 Buy 28.9% Hold 52.4%
2010*
2011*
2012*
Exhibit 4- U.S. High-Income Apartments Exhibit 4-5
Source: REIS. * Forecast.
44
2013*
0 0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
3 3
will convert into rentalsLas Vegas, Florida coastline cities, and Atlanta. Investors also need caution in suburban markets where for-sale housing turns into rentals and competes for tenants. In addition, multifamily players worry about the future of Fannie and Freddie, depending on what Congress decides to do with the failed lenders. Any reformulation will raise spreads, and originators must have more skin in the game.
Development
Low cap rates on existing apartments open the door to new construction. In some markets, you can develop for less than buying. Construction financing could be an obstacle, but life insurers and banks will step up if developers provide enough equity and go recourse. Expect apartment REITs to start projects, taking advantage of credit lines and superior balance-sheet positions to obtain financing.
Best Bets
Sellers with established assets can reap big gains. But why sell if you have a good income generator that should improve when the economy gets untracked? Barrier-to-entry markets, particularly the 24-hour metro areas, offer excellent opportunities, but expect plenty of company in any bidding. Valueadd investors can boost performance through classic fix-up strategies on older product as markets improve and tenant demand intensifies.
Outlook
People need a place to sleep and look for greater economies. In the Era of Less, apartments fit the bill. Since couples marry and start families later, homebuying inclinations from generation Y/echo boomers will not stir and intensify for another ten years. Until then, this large population cohort will rent as they build careers. More downsizing seniors will choose apartment lifestyles, too, living off proceeds from house sales. As long as developers and construction lenders check their appetites, apartment investors should benefit with the wind at their backs.
Avoid
Sidestep older apartments in commodity suburban districts where developers can easily build new product. It is harder to raise rents, and maintenance costs can eat into restrained revenues.
Industrial
Strengths
Despite record-high vacancies and continuing rent drops, warehouse properties sustain solid support from investors, who believe in their long-term revenue-generating characteristics. More than 90 percent of Emerging Trends survey respondents favor buying or holding warehouses in 2011, and the sector almost always garners higher ratings than any other category except apartments. This capital support helps shore NAREIT up values and mitigates losses in downturns. Shipping and trade activity show signs of modest improvement as NCREIF business inventories rebuild during the checkered recovery, and occupancy rates should begin to improve, assisted by extremely subdued development. Exhibit 4-
ExHIBIt 4-8
U.S. Apartment Property Total Returns

n NCREIF n NAREIt
40 40 35 35 30 30 25 25 20 20 15 15
Percent
10 10 5 5 -5 -5
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 1986 1987 1988 1989 1990 1991 1992 1993
0 0 -10 -10 -15 -15 -20 -20 -25 -25 -30 -30
U.S. Apartment Property Total Returns Weaknesses Exhibit 4-8
Sources: NCREIF, NAREIt. * Data as of June 30, 2010.
Vacancy heads down from uncomfortably high midteen levels, but we need a bunch of absorption to get to 8 to 10 percent. Despite reduced concessions, landlords will not gain pricing power again until late 2011 or into 2012 once occupancies increase above 90 percent. Were dealing in a more drawn-out recovery with not enough demand to push rents. Rolling five-year leases coming off peak rents during the next two years will balance out any occupancy gains and tamp down net operating incomes, delaying a performance upturn. Investors must watch evolving changes in distribuEmerging Trends in Real Estate 2011 45
ExHIBIt 4-9
U.S. Industrial/Distribution Investment Prospect Trends

8
ExHIBIt 4-12
U.S. Industrial Completions and Availability Rates

n Completions
300 300
Availability Rate %
R&D Industrial Warehouse Industrial

250 250
15
15
R&D Industrial
Warehouse Industrial
6 6
150 150 100 100
99
5 5
50 50
4 4
4 = modestly poor, 5 = fair, 6 = modestly good, 7 = good.

Source: CBRE Econometric Advisors. * Forecasts.
ExHIBIt 4-10
U.S. Warehouse Industrial

2011 Investment Prospects Development Prospects Prospects Fair Poor Rating 5.20 3.13 7.8% Sell 6.8% Ranking 3rd 3rd
tion modelsnot only the impacts of internet shopping and domestic point-to-point shipping, but also the consequences of a widened Panama Canal, increased railroad transport from expanding Mexican ports, and more presorted overseas exports.
ExHIBIt 4-11
U.S. R&D Industrial

2011 Investment Prospects Development Prospects Prospects Fair Poor Rating 4.63 2.88 7.6% Sell 17.0% Ranking 8th 5th
Emerging Trends interviewees continue to tout familiar global Hold Buy trade seaport destinations: Los Angeles/Long Beach, San Exhibit 4-10 Francisco, Seattle, New York/New Jersey, and Miami. Houston U.S. Warehouse and Dallas gain support from respondents who expect more Industrial shipping to be Exhibit 4-9 channeled through the Panama Canal and Mexico over the next decade. Canal widening will permit bigger ships from Asia to gain easier access to major Gulf and East Coast harbors. Houston stands to benefit, though its port is not deep enough to handle the largest ships, while Savannah and Norfolk prepare by deepening channels. West Coast ports could lose some market share, but given shipping trends, the United States desperately needs extra capacity to handle goods movement. Dont be worried about L.A./Long Beach, where one third of import/exports are handled.
Sell Hold
Best Bets Sell
Avoid
Exhibit 4-11 Investors need to exercise greater care in placing their indusU.S. R&D Industrial Exhibit 4-10 trial bets. A challenging and changing market features a ton of functional obsolescence, especially in shipping hubs where large tenants want taller and taller buildings as racking tech-
46
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013*
Buy
2004
2005
2006
2007
2008
2009
2010
2011
00
66
Availability Rate %
Completions (msf)
Rating
Exhibit 4-9 U.S. 200 200 Industrial/Distribution Investment Prospect Trends Exhibit 4-11
12
12
ExHIBIt 4-13
U.S. Industrial Property Total Returns

40 40 30 30 20 20 10 10 0 0
Percent
Hotels
Strengths
Hotels track back, thanks to modestly increased business and tourist travel rising off depressing nadirs. All key NAREIT metricsoccupancies, room rates, and revenuesshow improvement. Hotels have the most flexibility to increase NCREIF rates and can come back fastest. Operators were geniuses at cutting costs during the downturnputting fewer towels in Exhibit 4-13 U.S. Industrial Property Total rooms, eliminating nighttime turndown service, shutting down Returns Exhibit 4-13 elevators, you name it. After the worst slump in decades, the outlook can only get better. Business-center hotels in gateway destinations enjoy the best prospects. You can get some pop. The construction pipeline has mostly run dry, so new supply will not hamper recovery.
n NCREIF n NAREIt
-10 -10
-30 -30 -40 -40 -50 -50 -60 -60 -70 -70 -80 -80
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
-20 -20
Weaknesses
Highly leveraged owners who bought late in the cycle get weeded out and many properties change hands. Deferred maintenance and capital expenditures leave facilities threadbare, tired looking, and needing upgrades. New owners must factor necessary and often costly improvements into budgets. Five-star properties struggle to attract enough profitable business to sustain substantial overheads; luxury lifestyles pare back, too. At the other end of the spectrum, extended-stay and roadside motels face oversupply. Better-capitalized owners can reduce rates and knock out competitors. Skittish lenders show little interest in providing financing to buyers. Theres no such thing as a safe loan on a hotel, says an insurance executive. If you want to play, you might as well just own them. They are businesses, not property investments.
ExHIBIt 4-14
nology gets better. Depending on oil prices, more long-haul, cross-country distribution could shift from trucks to railroads. This could mean new distribution centers served by trains and shorter truck trips. The longstanding trend toward fewer and bigger distribution centers may be in for a change.
Development
Hammered rents cannot justify development, except for the odd build-to-suit. Until leasing rates spike 20 to 40 percent, depending on the market, new construction will continue to hover at or near record lows. Developers resign themselves to waiting until 2012 or 2013 before much activity resumes.
Outlook
Warehouse markets will bump along the bottom, firming slowly in a tepid recovery. Lukewarm consumer demand will not accelerate shipping and distribution, limiting the velocity of any leasing upsurge.
U.S. Hotel Investment Prospect Trends

8 8 7 7 6 6
Full-Service Hotels Limited-Service Hotels
Limited
Full-Se
Exhibit 4-14 U.S. Hotel Inves Prospect Trend Exhibit 4-22 2
Research and Development

Traditionally volatile, specialized R&D markets typically make good buys close to the market nadir. When the economy inevitably gains strength, high tech, life sciences, and computer industries will be in the vanguard. That is why investors should scope out opportunities in brainpower bastions like Austin, San Jose, and Raleigh-Durham, as well as submarkets in Boston, Seattles Silicon Forest, and the northern San Diego suburbs around La Jolla.
5 5
4 4 3 3
2004
2005
2006
2007
2008
2009
2010
2011
3 = poor, 4 = modestly poor, 5 = fair, 6 = modestly good, 7 = good.

47
ExHIBIt 4-15
Best Bets
Prospects Fair Very poor Rating 4.77 2.23 8.7% Sell 18.8% Ranking 6th 8th
U.S. Hotels: Full Service

2011 Investment Prospects Development Prospects
Over the course of any decade, there are two years to buy hotels and two years to sell them. Now is the time to buy. But investors must fork over substantial equity and not get overly enamored of lobby decors or presidential-suite creature comforts. This is a boom/bust property type, so prepare to sell quickly once any recovery takes hold.
Sell
Avoid
Hold Buy
ExHIBIt 4-16
U.S. Hotels: Limited Service

Buyers could overpay if they base pricing on a rapid return to peak occupancies and rates. Those assumptions may not pan out, even in the top markets. Big-ticket resorts and high-end convention hotels will suffer as travelers and companies continue to count their pennies and downscale. Do not expect spendthrift flings and anything-goes travel budgets to come back in fashion anytime soon. Also, beware of gambling-related hotels and resorts. Too many Native Americanoperated casinos compete for dollars from exhausted consumers who do not have the luxury of losing any more money after recent housing and stock market declines. In particular, Las Vegas loses some glitz.
Exhibit 4-15 U.S. Hotels: F ull Exhibit 4-26 Service
Development
Sell Hold Buy
Some lenders may consider financing an apartment project or a build-to-suit office for a high-credit corporation, but forget about a construction loan for a new hotel in the current environment: (virtually) no way.
Exhibit 4-16 U.S. Hotels: Limited Service Exhibit 4-27
ExHIBIt 4-17
ExHIBIt 4-18
U.S. Hotel Occupancy Rates and RevPAR

n Occupancy
80 80 70 70 60 60
U.S. Hotel/Lodging Property Total Returns

80 80
RevPar ($)
80 80 60 50
70 70
Exhibit 4-17 U.S. Hotel Occupancy Rates and RevPAR Exhibit 4-30
n NCREIF Occupancy () 70 n NAREIt 70
NAR
Occupancy (%)
RevPar ($)
50 50 40 40 30 30 20
60 60
50 50
20 10 0
40 40
10 0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011*
30 30
60 50 40 RevPAR () 40 30 30 20 10 20 0 0 -10 -10 -20 -20 -30 -30 -40 -40 -50 -60 -50
1994 1995
NCR
Sell
2009*
Hold Buy
Sources: Smith travel Research (1987 to 2009), PricewaterhouseCoopers LLP (2010 and 2011). * Forecast.
48
2010*
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Exhibit 4 U.S. Hot Total Re Exhibit 4
Percent
Outlook
In an encouraging sign, chocolates are back on pillows. But hotel performance correlates closely to growth in gross domestic product (GDP), and an expected elongated economic recovery bodes for a more-sluggish-than-typical resurgence in the lodging sector. Strong brands should attract more business: guests prefer to play it safe with tried-andtrue innkeepers and make sure budgets go farther. Those reward programs help, too. This sector is not for the faint of heart. You need a good operator.
ExHIBIt 4-19
U.S. Office Investment Prospect Trends

6
Central City Office Suburban Office
Suburb
Central
5 5
Exhibit 4O ce Inv Prospect Exhbiit 4-
4 4
Office
Strengths
Not all office is created equal. Class A buildings in primary 24-hour markets remain highly coveted by tenants and investors. Corporate heavyweights and white-glove service firms still want the prestige and visibility provided by signature space. Cash-flush, high-net-worth investors and foreign buyers may gravitate to familiar skyline landmarks for ego benefits or out of familiarity, but these high-profile properties can hold values and sustain cash flows as well as any real estate subsector. Well-capitalized owners will continue to keep rollover tenants in place and lure existing tenants away from debt-ridden competitors, using improvement packages and free rent periods. But some concessions begin to shrinka good sign for the overall market.
3 3
2004
2005
2006
2007
2008
2009
2010
2011

ExHIBIt 4-20
U.S. Central City Office

2011 Investment Prospects Development Prospects Prospects Fair Very poor Rating 5.08 2.35 7.1% Sell 12.1% Ranking 4th 7th
Sell Hold
Buy
Weaknesses
Ugh. Where to begin? Outside of New York City, Washington, D.C., and a handful of other 24-hour downtown cores, few markets sustain a pulse, buried under high vacancies and falling revenues. Demand is the worst Ive ever seen. Companies turn ultracost conscious, expecting deals and wanting efficiencies, which creates problems for landlords with older, more obsolescent space. Renewing firms rarely expand and either take the same amount of space or less, not as a function of recession or one-time downsizing, but reflecting a new way of doing business and a focus on expense levels. More companies outsource and move jobs around on a global playing field to gain productivity advantages. Its pervasive. Meanwhile, concessions eat into returns: Face rents dont tell the story. Investors turn more wary, especially about commodity assets. Office outperforms only at peaks; you need to time the market. They grow especially weary of inconsistent cash flows, high capital expenditures, inevitable concessions in market troughs, exposure to lumpy tenant rollovers, and only narrow windows of profitability.
Exhibit 4-20 U.S. Central City O ce Exhibit 4-14
ExHIBIt 4-21
U.S. Suburban Office

2011 Investment Prospects Development Prospects Prospects Modestly Poor Very poor Rating 3.99 1.83 8.3% Sell 29.8% Ranking 11th 11th
Sell Hold
Buy
Exhibit 4-21 U.S. Suburb Exhibit 4-15
49
ExHIBIt 4-22
ExHIBIt 4-24
U.S. Office New Supply and Net Absorption

n Completions
120 120 100 100 80 80 60 60 40 40 20 20 00
U.S. Office Property Total Returns

60 60
Net Absorption (msf ) 50
Net Absorption
n NCREIF n NAREIt
120 120 100 100

80 80 40 40 20 20 60 60
50
Completions (msf ) 40 40
00
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-40 -40 -60 -60 -80 -80 -100 -100
-20 -20 -30 -30 -40 -40 -50 -50

Source: CBRE Econometric Advisors. * CBRE Econometric Advisors Forecast.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013*
ExHIBIt 4-23
Avoid
U.S. Office Vacancy Rates

25
25
2020
Downtown
Suburban Office
1515
Suburban markets could take years to recover as occupancies slump in the low 80s with no material demand drivers. Cutthroat leasing economics give away free rent and tenant improvements, slicing into net rents. I cant imagine Suburban why anyone would want to own a suburban office building. Downtown It used to be back offices went to the suburbs. Now they go to India, Guatemala, Warsaw, or wherever. These easy-tobuild assets turn into a trading commodity. Owners have no pricing power over a cycle. The best you can hope for is stabilized vacancies in the 10 to 15 percent range.
Exhibit 4-23 U.S. O ce Vacancy Rates Development Exhibit 4-18 On a market-enforced siesta, developers must carefully cali-
1010
5
2009* 2010* 2011* 2012* 2013* 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: CBRE Econometric Advisors. * CBRE Econometric Advisors forecast.
Best Bets
Investors with sidelined cash will pursue the best properties in the best markets. Even though it scares me that people use office less, its hard to stay away from the best assets. Tenants should be very motivated to take advantage of low rents and concessions while they can. Were several years away before landlords regain leverage over tenants, but at least its moving more in that direction. 50 Emerging Trends in Real Estate 2011
brate locating and timing their next buildings. History shows that following a downturn, early-out-of-the-ground projects have the best success. Usually they are completed into a wave of tenant demand. But this cycle may be different, if the nations jobs engine does not ignite and companies stay in efficiency mode. Many secondary and tertiary markets will not attract enough growth to warrant much building activity. Developers instead focus more on infill locations near vibrant downtown cores and urbanizing suburban nodes, and realize new projects will need to go green.
2009
-20 -20
30 30 Exhibit 4-22 U.S. O ce 20 20 New Supply 10 10 and Net Ab0 sorption 0 Exhibit 4-17 -10 -10
Percent
Completions (msf)
Net Absorption (msf)
2010*
Exhibit O ce P Total Re Exhibit
Outlook
How much office space do we really need? Companies seem to figure not as much. Expect only pockets of improvement, mostly in and around the global gateways. Without employment growth, its a zero-sum game. Somebody is winning at somebody elses expense. Better buildings in better markets will fill up [vacancies] first, while B and C assets struggle and any obsolescence deters leasing. Through 2011, tenants will look to trade up from Class B to A space and retain the upper hand in any lease negotiations. Inevitably, concession packages become less generous.
ExHIBIt 4-25
U.S. Retail Investment Prospect Trends
8 8 7 7 6 6 5 5
Neighborhood/Community Centers Power Centers Regional Malls
Region
Power C
Neighb
Rating
Retail
Strengths
Horrendously low expectations havent been met, and shopping-center investors regroup. Were now realistically confident we can get through this rough period. Retailers closed weak stores and shed more than a million jobs, improving margins, enhancing inventory management, and making higher profits off smaller volumes. They now realign lineups in the best locations, benefiting fortress malls and prime infill community/power centers, but open smaller stores and command lower rents. At least tenant seepage has stopped. Owners of good retail centers with high-credit tenants also can secure financing. Im surprised by how well its held up. In a survival of the fittest environment, the strong not only endure, but fortify.
4 4 3 3 2004 2005 2006 2007 2008 2009 2010 2011
Exhibit 4U.S. Retai Investme Prospect Exhibit 42004

retailing already takes about a 10 percent market share away from bricks-and-mortar stores, with more to come. People continue to spend less time in malls.
Best Bets
It is the same old story as during any flight to quality: investors want only the best propertiesthe best retailers, the best physical plant, and the best location. REITs long ago corralled most fortress malls and many prime grocery-anchored centers. Infill assets enjoy better prospects as retailers scout for more locations in urban and urbanizing districts. Secondary locations stay out of play unless [the investments are] absolute steals, and there is only limited buyer interest in B/B+ malls. But savvy opportunistic investors may pick off some winners by recognizing the survivors. Any center with sales per square foot in the $250 range confronts change of use and redevelopment. Tenants, meanwhile, should use their ample leverage to lock in favorable deals.
Weaknesses
Pessimism may have been overdone, but only by degrees. Levels of concessions have been unprecedented. Malls look full, but owners forgive back rent, cap CAM [common-area maintenance] charges, or just let stores stay open without paying anything. Sales start to increase as shoppers concentrate buying activity in surviving locations, but overall, consumers do not spend enough. Were limping along. Strong centers poach tenants from weaker malls. It [the poaching] is open and notorious. For years, interviewees have wondered about Americas absurd retail-space-percapita ratiosthe worlds highest. Some gross leasable area will be wiped out across the shopping center landscapeanywhere from 5 to 10 percent. If you drive around some suburban neighborhoods, everything is empty. Now malls and power centers lure supermarket chains into empty anchor locationsanother blow to some already-shaky community centers, which have trouble meeting loan requirements or gaining access to refinancing capital. Internet
Avoid
In the current climate, fringe retail strips, depending on momand-pop tenants, face longer odds. Regional malls under 1.5 million square feet lose ground as retailers concentrate in larger fortress centers. The lifestyle fad also seems to have run its course: a phenomenon of living large expectations diminishes in credit-starved times. Power centers with empty boxes may have trouble finding replacements.
51
ExHIBIt 4-26
U.S. Neighborhood/Community Centers

ExHIBIt 4-29
U.S. Retail Completions and Vacancy Rates: Top 50 Markets

n Completions
35 35
Sell Hold Buy
Vacancy Rate %
12 12

Note: Based on U.S. responses only.
Sell
30 30 25 25 20 20
Hold
Completions (msf)
15 15 10 10
88
ExHIBIt 4-27
U.S. Regional Malls

5 5
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009* 2010* 2011* 2012* 2013*
0 0
66
Source: REIS. * Forecasts.
ExHIBIt 4-30
Sell Hold Buy
U.S. Retail Property Total Returns

Sell Hold Buy
Exhibit 4-27 U.S. Regional Malls Exhibit 4-21
50 50 40 40 30
n NCREIF n NAREIt
30 20
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
0
ExHIBIt 4-28
20
Percent
U.S. Power Centers

Vacancy Rate %
Hold 41.8%
Buy
Exhibit 4-26 U. S. Neighborhood/Community Centers Exhibit 4-20
10 10
Exh U.S and 50 Exh
10
-10 -20 -30
-10 -20 -30
Exh U.S. Prop Tota Exh
-40 -40 -50 -50
Sell Hold Buy
Sell Hold Buy
Exhibit 4-28 U.S. Power Centers Exhibit 4-22
Development
Simply nada. For the first time since the early 1950s, no regional malls are under construction in the United States. Thats stunning! The big REITs focus on growth through consolidation, not building. Realistically, most areas need less retail, not more. Endless strip construction is over. And some suburban shopping centers in densifying dis52 Emerging Trends in Real Estate 2011
tricts must reinvent themselves. We have the opportunity in this hiatus to rethink how we deliver retail in better transportation-linked urban centers, moving away from car-dependent models. Expect more mixed-use concepts involving residential space. An aging population wants to drive less, and people in general want to shop closer to where they live. Any new development will focus on infill, rejecting big bets on emerging locationsbut nothing happens in 2011.
Outlook
Shopping center owners could sustain a painful one-two punch. As a retrenching America buys less, more technologically enabled consumers also will reduce visits to traditional retail formats. Chain stores will morph into and be reconstituted with different concepts and looks, harnessing web innovations to drive more sales, whether online or in malls. Smaller stores in high-visibility, central locationsurban and suburban nodesfit their parameters. Just like premier city shopping districts survived the postWorld War II move to the suburbs, well-situated fortress malls and community retail will prosper in denser 21st-century suburbs. Probably more than any other property sector, retail braces for significant change.
may be afraid to take the plunge given the unsettled jobs outlook, but many others have limited savings and debts to pay offcredit card, car loan, and mortgage. Trading-up buyers, a mainstay of transaction activity, cope with underwater mortgages on their existing homes, and lenders shut out speculators. You cant get blood out of a stone.
Best Bets
For buyers with cash and sound credit, make no mistake: the time is right to acquire dream homes in dream locations. Market-bottom prices and record-low mortgage rates provide a unique opportunity to acquire assets at attractive discounts. You can have your pick of the right resort golf course hacienda or oceanside condo. Empty-nester parents can buy city digs for kids in preparation for downsizing out of suburban homes when markets look better. If you have money, you have plenty of options.
Housing
Strengths
Housing markets may offer lessons for other real estate sectors: prepare for a long slog back to equilibrium after bouncing around on the bottom. Time and ongoing deleveraging will cure current imbalances, while forecast population growth will eventually sop up excess inventory so prices can advance (modestly). Low interest rates keep markets from getting worse and let high-credit borrowers reduce their mortgage costs. Not surprisingly, upscale neighborhoods in 24-hour cities and fashionable suburbs generally sustain values. Sound familiar?
Avoid
Steer clear of tract mansions, the Hummers of real estate. They never made much economic sense, given big heating bills, high property taxes, and large maintenance costs. Now theyre as obsolete as the cars. Housing in commodity subdivisions and more car-dependent areas may take decades to recover peak pricing.
Development Weaknesses
Misery engulfs many U.S. homeowners who overleveraged in a fantasy of ever-escalating values. The market crash erases not only cash equity on which they were depending to sustain lifestyles, but also (American) dreams of secure financial futures. It takes a long time to recover lost value in a normalized market, let alone in an abnormally depressed one. Absent cheap credit, low early-year payments, and lackadaisical underwriting, many borrowers at all income strata could not really afford their homes and paid too much at inflated prices. Perversely, people with bad credit who need help the most have been unable to take advantage of low interest rates to refinance or hold on to their homes as lenders belatedly tighten standards. Even worse, many potential homebuyers cannot muster enough equity to afford slashed prices and take advantage of the low mortgage rates. Some Good luck!
ExHIBIt 4-31
U.S. Single-Family Building Permits

2500
2,500
Thousa
2000 2,000
thousands of Units
1500 1,500 1000 1,000
500 500 0 0
Source: Moodys Economy.com. * Forecast.
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013*
53
ExHIBIt 4-32
The S&P/Case-Shiller Home Price Composite-20 Index

250 250
ExHIBIt 4-33
Prospects for Residential Property Types in 2011

Sell
Development
5.44 4.79 5.30 Investment 4.71 5.22 4.30 5.10 4.58 4.40 3.15 4.18 3.42
Hold Buy
200 200
150 150
Exhibit 4-32 The S&P/Case-Shiller HomeStudent Housing Price Composite-20 Index Exhibit 4-33
Seniors Housing
Index
Infill and In-town Housing
Sell
100 100
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
Affordable Housing
Hold Buy
Source: Standard & Poor. * Data as of June 30, 2010.
Detached Single-Family: Moderate Income Manufactured Home Communities Attached Single-Family Detached Single-Family: High Income Multifamily Condominiums Second and Leisure Homes Golf Course Communities
1 Abysmal Source: Emerging Trends in Real Estate 2011 survey. Note: Based on U.S. respondents only. 5 Fair
Outlook
Housing could stay in critical care well into 2012 or even 2013, until foreclosures and resale product clears. Only then can homebuilders resume activity, hoping that by then echo boomers with improved career prospects start to bail them out, buying at prices 30 to 40 percent off peaks. Shellshocked by recent events, fewer people will be able to afford homes or feel comfortable owning them. Depending on what happens to Fannie Mae and Freddie Mac, mortgage spreads should widen and rising interest rates eventually will lead to higher borrowing costs. Underwriting standards will loosen, but purchasers will still need significant equity stakes and solid credit histories in the new world order. Developers have less success with greenfield subdivisions and concentrate on infill areas. Attached homes (townhouses) and other forms of in-town housing become more favored. Dont be surprised if more families rebond into intergenerational units grandparents, parents, and grandchildren all living under one roof to share costs.
Exhibit 4-34.10 3 2.97 Prospects3.77Resifor 2.64 dential Pr3.61 operty 2.37 Types in 2011 3.13 1.98 Exhibit 4-2.78 31
1.71
9 Excellent
Niche Sectors
Retirement Housing
The common wisdom posits that bulging numbers of graying baby boomers will soon populate seniors housing developments, which should be a major growth sector for builders. Indeed, seniors housing registers relatively high scores for residential investment and development prospects in Emerging Trends surveys (see exhibit 4-33). But new realities may temper demand for retirement housing. People wait longer to buy into seniors facilities, says an interviewee. Living longer and staying healthier, they enter retirement communities toward the end of life when they have no choice and dont stay as long. Now the economy pushes decisions further off. Compromised
54
ExHIBIt 4-34
Medical Office
As baby boomers age, physician visits will soar. Building and owning medical offices plays well into the expected demand wave. Investors concentrate activity around major hospital complexes. But this niche sector offers only a shallow pool of opportunitiesmore for local owners than institutional investors.
Prospects for Niche and Multiuse Property Types in 2011

Development
5.62
Medical Office Infrastructure Data Centers Urban Mixed-Use Properties Self-Storage Facilities
Sell Hold Mixed-Use town Centers
Investment 5.21
4.80
Student Housing
Echo boomers boast their own growing influence not only in multifamily, but also in student housing. Overflowing college campuses cannot handle demand in existing dorms, and older students prefer off-campus residences. Developers and investors should hurry: in about ten years, the number of college-age kids sharply declines.
Exhibit 4-34 Prospects for 4.18 Niche and Multiuse Property 4.63 Types in 2011 Exhibit 4-34 3.42
4.49 3.56 4.28 3.09 3.81 2.63 3.54 1.99 3.48 2.53 3.04 2.01
1 Abysmal 5 Fair 9 Excellent
4.84 4.92
Infrastructure
Considering compromised outlooks for commercial and residential sectors, many investors and developers contemplate possible growth schemes and take interest in infrastructure. More than 30 years of government underfunding and large deficits leave the United States in a major quandary for how to revamp and finance obsolete systems. Officials come to understand that a longstanding disconnect between local and regional planners, as well as a nonexistent national infrastructure strategy, leaves many metropolitan areas with inadequate roads, mass transit, and water resources to sustain future growth. Anticipate government leaders and institutional investors joining forces in trying to find solutions for the infrastructure dilemma through public/private partnerships. A national infrastructure bank, patterned on the post World War II European model, and tax incentives for public/ private partnerships could be among necessary initiatives.
Lifestyle/ Entertainment Retail Resort Hotels Master-Planned Communities Master-Planned Resorts
Buy
retirement savings and depleted pensions mean many seniors cannot afford seniors housing and neither can their children, so they stay in place or move in with kids for as long as they can. No doubt, more nursing home and elder care facilities will be needed over the next 20 years as leading-edge boomers hit the 85-year-old threshold. But in the meantime, living in pedestrian-friendly, 24-hour neighborhoods probably makes more sense than suburban residences for many ambulatory seniors: they maintain independence and can get to stores and doctors easily. Seniors housing developers begin to reconsider strategiespondering urban apartment residences and thinking twice about more typical landscaped suburban projects for younger seniors. Emerging Trends in Real Estate 2011 55
y agree, 2 = agree, 3 = undecided, 4 = disagree, 5 = strongly disagree
56
c h a p t e r
Canada
anada barely experienced recession and jolted into a V-shaped recovery. Now, 2011 promises slowing, steady growth and decent prospects for real estate investors as long as the U.S. economy does not drag them down. Relieved Canadian property owners and financial institutions cannot help contrasting their reasonably healthy condition with parlous U.S. markets. Fundamentals trend near equilibrium, employment bounces back, and banks boast sound balance sheets. Most industries experience growth, including finance and energy, which helps support the service sector. The domestic consumer has been pushing the economy, and jobs levels bounced back to prerecession levels. Its been phenomenal compared to the U.S.
Emerging Trends in
ownership
In Canada, real estate behaves as advertised, producing steady cash floworiented returns without much volatility, but an
hold mentality frustrates investors looking for opportunities to buy.
We have no distressno distressed banks, no distressed owners, no distressed sales. Now, rising interest rates coupled with tight bank requirements tamp down a recent homebuying spurt, particularly in Ontario and British Columbia, where purchasers stepped up activity before a new sales tax went into effect.
Exhibit 5-1 Exhibit 5-1
Firm
Exhibit 5-1
Firm Profitability Forecast

Prospects for Profitability in 2010 by Percentage of Respondents
Prospects for Protability in 2010 by Percentage of Respondents Modestly Poor 4.1% Modestly Good 22.5% Very Good 10.2%
Investment Prospects
U.S. Connection. Recent experience puts Canada in a better place and boosts confidence that we can escape U.S. problems. Always linked to its more populous southern neighbor, the nation tries to diversify beyond a dependence on U.S. exports, extending trading relationships to Europe and Asia, particularly China. Still, a weak U.S. greenback and sputtering U.S. economy dampen cross-border commerce, hurting especially Ontario industrial markets, which serve Midwest manufacturing centers. No Distress. The big difference for Canada has been the
sound condition of its banksyou can get a loan for anythingsince lenders maintained relatively strict underwriting standards and never were sucked into the CMBS maelstrom.
Exhi Exhi
Poor 4.1%
Fair 26.5%
Good 28.6%
Excellent 2.0%
0 Poor 2.0% 20 Very
40
60
80
100
Prospects for Profitability in 2011 by Percentage of Respondents

Very Poor 2.0% Modestly Good 30.6%
Prospects for Pro tability in 2011 by Percentage of Respondents

Very Good 8.2%
Fair 16.9%
20
40
60
Good 40.8%
80
Excellent 2.0%
100
120
Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian respondents only.
57
Exhibit 5-2
Emerging Trends Barometer 2011
Exhibit 5-3
Real Estate Business Prospects for 2011

6.08 5.89 5.80 5.80
Sell
bank Real Estate Lenders Bank Real Estate Lenders insurance Company Insurance CompanySellEstate Lenders Real Estate Lenders Real Public Public Equity REits HoldEquity REITs 7 7 Private Local RealPrivateInvestors Estate Local Real Estate investors Buy 6 6 Private Equity REits Private Equity REITs Pension Real Estate Funds Pension Real Estate Funds 5 5 Real Estate investment Managers Real Estate Investment Managers Private Real Estate Equity Funds Private Real Estate Equity Funds 4 4 Real Estate Consultants Real Estate Consultants and Attorneys & Attorneys Real Estate brokers Real Estate Brokers 3 3 2008 2009 2010 2011 Mortgage REits Mortgage REITs Commercial/Multifamily 3 = poor, 5 = fair, 7 = good Commercial/Multifamily Developers Developers Source: Emerging Trends in Real Estate 2011 survey. Architects/Designers Architects/Designers Note: based on Canadian respondents only. homebuilders/Residential Homebuilders/Residential Land Developers Land Developers CMbS Lenders/issuers CMBS Lenders/Issuers Investment Malaise. For 2011, fundamentals should be okay, not great. Capital is backall the savvy players have FAKE 1 1 Absymal 2 dry powderand (as usual) investment opportunities will be FAKE2 0 limited; institutions dominate the major central city markets,
8 8
Buy Hold
buy hold Sell
5.79 5.76 5.66 5.65 5.60 5.30 5.29 5.12 5.02 4.94 4.31
5 Fair
8 Excellent 10
holding on to assets for steady income instead of trading. Emerging Trends respondents exemplify the hold-on mentality: they think it is a good time to buy, but do not want to sell (see exhibit 5-2). Bids are strong, says a broker, but nothings for sale. Investors go crazy because there isnt anything to buy, and try to show discipline by walking away rather than overpaying for what is available. They have only slim chances to land discounted bargainsmaybe off market in a fringe suburban district or a hotel where the owner has cash-flow problems. In this compressing cap rate environment, many deal-starved Canadians will be active in the United States, where they should have greater opportunity to spend their bankrolls and find higher yields.
Restrained Development. Except in Calgary, Canadas version of Wild West hot growth, builders have not overstepped. Imagine: no large developers have gone bankrupt in the country. North Americas largest condominium market, Toronto keeps erecting high rises, but a greenbelt boundary to encourage denser neighborhoods helps support urban residential development. Toronto probably needs to take a breather in new office construction: four major new buildings come on stream. And the country does not need much additional retail space. Ontario typically provides good industrial development opportunities, but until the U.S. economy strengthens, sluggish demand does not support much new building. Pushed by municipal policies and code changes, Canadian developers increasingly buy into green building trends: Anyone who doesnt embrace it will be economically imperiled.
58
Chapter 5: Emerging Trends in Canada
Exhibit 5-4
Prospects for Capitalization Rates

Exhibit 5-4 Real Estate Capital Cap Rate Cap Rate Market Balance Forecast for 2011 Exhibit 5-4 Rate Cap December Shift
Exhibit 5-5
Real Estate Capital Market Balance Forecast for 2011

Expected Expected Equity Capital for Investing
Equity Capital for Investing Responses Substantially Moderately
August 2010 Equity Capital for Investing Property Type Responses (Percent)
Exhibit 5-4
Market Apartment Rental:Moderately Undersupplied BalanceReal Estate Capital high income 5.92 22.5 Forecast for 2011 5.74 -19 Exhibit 5-4 Exhibit 5-4 Market Balance Forecast for 2011 In Balance 20.4 Apartment Rental: Moderate income 6.24 6.06 -18 Exhibit 5-4 Moderately Oversupplied 42.9 Equity Capital for6.46 Investing Central City Office 6.35 -10 Equity Capital for Investing Substantially Oversupplied 8.2 Responses Responses Power Centers 7.01 -35 Substantially Undersupplied 6.1 Substantially Undersupplied 6.16.66 Moderately Debt Capital for Acquisitions Moderately Undersupplied 22.5 In Balance 20.4 Neigh./Community Shopping Ctrs.Balance Undersupplied 22.5 7.28 6.87 -41 In 20.4 Responses Moderately Oversupplied 42.9 Substantially Oversupplied 8.2 Moderately Oversupplied Regional Malls Substantially Undersupplied 10.2 42.9 6.77 6.89 +13 Substantially Oversupplied 8.2 Acquisitions Undersupplied Suburban Office ModeratelyDebt Capital for 7.41 40.8 7.34 -7 In Balance Responses Undersupplied 10.2 40.8 Substantially Debt Capital for Acquisitions 40.8 Warehouse industrial 7.58 8.2 7.56 -2 ModeratelyModerately Undersupplied Oversupplied Responses In Balance 40.8 Moderately Undersupplied 8.2 Substantially Oversupplied R&D industrial Substantially Oversupplied 0.0 10.2 7.76 7.77 +1 Substantially Oversupplied 0.0 Moderately Undersupplied 40.8 Full-Service hotels 8.67 8.68 +1 In Balance 40.8 Moderately Oversupplied 8.28.98 Limited-Service hotels 9.15 -16 Debt Capital for Re nancing
Substantially Undersupplied 6.1
Real Estate Capital
2011 (Percent)
(Basis Points)
Undersupplied 6.1%
Oversupplied 42.9%
Equity Capital for Investing Responses

Equity Capital for Investing Responses Moderately in balance 20.4% Undersupplied 22.5%
20
40
60
80
Substantially Oversupplied 8.2%
Substa
Substa
100
In In Bala 120 Bala
Moder
Moder
Moder Moder
Substa
Debt Capital for Acquisitions Responses DebtCapital for Acquisitions 20 40 60

Undersupplied 10.2%
Debt Capital for Acquisitions Responses
Substa
80
100
120
Substantially 20 0
40
60
80
Moderately 100 Oversupplied 8.2%
120
Substantia
Debt Capital for Acquisitions Responses
Moderatel
In Balance
Substanti Moderatel
ubstantiall Moderate 0 20 40 Moderately 20 40 Undersupplied 40.8% Debt Capital for Re nancing Responses
Debt Capital for Re nancing Substantially Undersupplied 12.2 Responses Moderately Undersupplied 26.5 Source: Emerging Trends in RealSubstantially Undersupplied 12.2 Estate 2011 survey. In Balance 53.1 Moderately Oversupplied 6.1 Moderately Undersupplied 26.5 2.0 Substantially Oversupplied Note: based on Canadian respondents only. Debt Capital for Re nancing In Balance 53.1 Responses Moderately Oversupplied 6.1 Substantially Undersupplied 12.2 Substantially Oversupplied 2.0 26.5 Moderately Undersupplied
Substantially Oversupplied Responses
0.0
in60 balance 40.8%

60
In Balanc
80 100
80
100 ubstantia
In Balance
Moderate
Substantial
Debt Capital for Re nancing Responses

20 Debt Capital for Refinancing
20
Moderately
40
60
80
100
Moderately
Substantial
Capital in Balance
In Balance 53.1 Moderately Oversupplied Substantially Oversupplied
Substantially Debt Capital for Re nancing Responses Undersupplied 12.2%

40
60
80
6.1 2.0
Moderately 100 Oversupplied 6.1%
Substantia
Moderate
In Balance
Moderate
Canadians admirably restrain any national gloating, but they can lay claim to having one of the worlds healthiest capital markets. Liquidity is back; no ones hard pressed. Except for some hotel owners, few borrowers confront refinancing issues. In Canada, the real estate industry didnt get overlevered, and the markets never suffered any interruption of credit availability. Canadian banks benefit from a combination of institutional risk aversion and relatively stringent government regulation. Bankers prefer to credit their own discipline rather than regulator oversight: We have fear of losing money. For whatever reasons, the system works, and the country and its consumers have no credit hole to dig out of. During the past several years, very cheap debt propelled housing prices, but recent government interest rate hikes discourage further bubble formation, and lenders never sold exotic mortgage structures. Overall in 2011, Emerging Trends respondents expect a reasonable balance in debt market capital availability and an oversupply of equity capital, the result of nonsatiated buyers (see exhibit 5-5).
0
0
Moderately Undersupplied 20 26.5%
20
in balance 53.1%
40 60
40
Substantially Oversupplied 2.0%

80
60
80
100
100
Substantia
Insurers and Pension Funds. A dominant handful of large

insurance companies and public pension funds, which link liabilities to steady property cash flows, will continue to command ownership of the countrys trophy commercial assets downtown office space and regional malls. This story does not change.
REITs. Prices leveled off after strong run-ups in 2009. For 2011, analysts do not see much room for big gains, and these stocks should stick close to valuations. Managements cant significantly improve cash flow generation, but returns should be solid.
59
Exhibit 5-6
Equity Underwriting Standards Forecast for Canada

More Rigorous 35.4% Will Remain the Same 54.2%
Exhibit 5-9
Active Providers of Debt Capital in 2011

Less Rigorous
Mezzanine Lenders Mezzanine Lenders
Will Remain the Same
2.24
Exhibit 5-22 New Exhibit Active Providers of Debt Capital in 2011
More Rigorous Commercial Banks 2.38 Commercial banks
Insurance Companies insurance Companies
2.52 2.53 2.76 2.91 3.41

0.00 0.5 1.0 1 1.5 2.0 2 2.5 3.0 3 3.5
Sell Hold Buy
Less Rigorous 10.4%

0
Exhibit 5-19 Equity Underwriting Standards Forecast for Canada Like Exhibit 2-5
Nonbank Financial Nonbank Financial Institutions institutions

Mortgage REITs Mortgage REits
Source: Emerging Trends in Real Estate 2011 survey. 60 20 40 Note: based on Canadian respondents only.
80
100
Government-Sponsored Government-Sponsored Entities
Entities CMbS
Securitized Lenders/ Securitized Lenders/CMBS

Exhibit 5-7
Debt Underwriting Standards Forecast for Canada

More Rigorous 52.1% Will Remain the Same 31.3%
1 = strongly agree, 2 = agree, 3 = undecided, 4 = disagree, 5 = strongly disagree Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian respondents only.
Sell Hold Buy
Less Rigorous 16.7%

Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian respondents only. Exhibit 5-10
Preferred Strategy for Lenders

Sell to a third Party 13.04% Foreclose and Dispose 10.87%
Exhibit 5-8
Extend without M
Active Buyers/Acquirers of Real Estate in 2011

Public Equity REITs Public Equity REits
Extend with Mortg
2.22 2.23 2.38 2.39 2.50 2.62

0.5
PrivatePrivate Local Investors Local investors Pension Funds Private Equity/Opportunity/ Private Equity/Opportunity/Hedge Funds hedge Funds
Private REITs Private REits Cross-border Investors Cross-border investors 0.00
Exhibit 5-21 Active Buyers/Acqui rers of Real Estate in 2011 New Exhibit
institutional investors/ Institutional Investors/Pension Funds
Extend without Mortgage Modification 8.70%
Extend with Sell to a Third Part Mortgage Foreclose and Disp Modification 67.39%
Exhibit 5-23 New Exhibit Preferred Strategy for Lende
Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian respondents only. 2 2.0
2.5
1 1.0
1.5
3 3.0
1 = strongly agree, 2 = agree, 3 = undecided, 4 = disagree, 5 = strongly disagree Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian respondents only.
Foreign Investors. If it is not hard enough for domestic investors to find good acquisition opportunities, foreign players struggle even more to break in. Its just hard to buy in Canada with markets dominated by a few players, so offshore investors cant build portfolios easily.
60
Exhibit 5-11
Exhibit 5-12
Canadian Markets to Watch

Prospects for Commercial/Multifamily Investment and Development n investment n Development toronto Vancouver Ottawa Montreal Edmonton Calgary halifax
0 11 2 3 4
Canadian Markets to Watch Prospects for For-Sale Homebuilding

Prospects for For-Sale Homebuilding toronto Toronto 6.19 5.28 5.77 4.96 5.47 4.37 5.43 4.25 5.07 4.10 4.70 3.84 4.35 3.84
Vancouver Vancouver MontrealMontreal OttawaOttawa EdmontonEdmonton CalgaryCalgary Halifaxhalifax 0
5.52Prospects for For-Sale Homebuilding

Exhibit 5-16 Canadian Markets to Watch Exhibit 5-9 Prospects for For-Sale Homebuilding
Toronto
5.49
couver
5.08
5.04
Ottawa
4.63 4.61 3.82 1 Absymal

1 2 3 4
ontreal
monton
Calgary
5 Fair
9 Excellent
Halifax
Absymal
5 5 Fair
9 8 Excellent
Markets to Watch
For 2011, major Canadian real estate markets settle in a fair to good investment range, with only modest investment prospects and constrained development potential. Toronto bumps Vancouver from the top ranking in the Emerging Trends survey, while Calgary must hope to recuperate from cooled demand and a touch of development binging. Population continues to concentrate in and around a handful of major 24-hour cores scattered from coast to coast, leaving extremely limited investment opportunities in small cities and rural areas in between. Shut out of primary cores, some investors scrounge for product in select secondary and suburban markets.
Toronto. Canadas where-to-be market, Toronto stands out

as a primary North American gateway and the countrys most important economic engine. This vibrant metropolitan area radiates lots of positivesthe rock-solid Bay Street financial sector and diverse manufacturing industries and service
businesses, as well as immigration flows to support growth. Were hard to slow down. Some softness creeps into the office market as major tenants play musical chairs and move into new Class AAA development projects. No one gets too worried about vacated buildings because institutional owners will spend the necessary money to upgrade, reposition, and release space into future demand. Market vacancy will not increase materially above the current mid-single digits, and any near-term additional office development will be small and niche. Observers wonder how the condo market just keeps expanding: new apartment projects pop up in all directions, fashioning one of the worlds most expansive vertical skylines. Provincial policies encourage density in high-rise development south of a legislated greenbelt, which pressures demand. We need approximately 40,000 new housing units to keep pace with population growth, but new projects provide less than 20,000. Smart money figured out you can make a ton on infill land parcels, and anything near transit stations looks like gold. However, opportunities are few: If youre already in the game and own, you can make a lot of money; if youre not, it may be impossible to get in. Some interviewees worry about flattening apartment rents as a surfeit of condo investors lease out units. High housing prices and immigration flows help make apartments a good bet. Investors retain interest in
61
Canadian Apartment Buy/Hold/Sell Exhibit 5-10 Canadian Apartment Recommendations by Metropolitan Area Buy/Hold/Sell Recommendations by
Metropolitan Area
Exhibit 5-13
Exhibit 5-15
Canadian Retail Property Buy/Hold/Sell Recommendations by Metropolitan Area

n buy n hold n Sell
Sell
Calgary Calgary
32.4%
54.1%
13.5%
Calgary
Calgary
23.1%
59.0%
18.0%
Hold Buy Montreal
n buy n hold n Sell
Montreal Montreal
33.3%
51.9%
14.8%
Montreal
29.0%
54.8%
16.1%
Toronto toronto
46.3%
43.9%
9.8%
Toronto
toronto
40.9%
47.7%
11.4%
Vancouver
Vancouver
0 0%
40.4%
20 20% 40 40%
40.4%
60 60% 80 80%
19.2%
100 100%
Vancouver
Vancouver
0
38.0% 0% 20%
20
52.0% 40%
40
10.0% 80%
80
60%
60
100%
100
120
Source: Emerging Trends in Real Estate 2011 survey. Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian responses only. Note: based on Canadian responses only.
Exhibit 5-14
Canadian Office Property Buy/Hold/Sell Recommendations by Metropolitan Area

n buy n hold n Sell
buying and holding industrial properties, which should recover from higher-than-average vacancies and rent declines once the United States gets untracked.
Vancouver. Office and condo markets almost defy logic;

they stay red hot. Instead of experiencing a post-Olympics dip, the city caught the attention of well-heeled international visitors, who stuck around and bought apartments after the games. Everybody wants a view and waterfront location, but not everybody can afford it. Many wealthy Asians park money and look for a path to eventual citizenship. Institutional investors control the relatively small office market, which enjoys minuscule vacancies. Surrounded by water and mountain vistas, Vancouvers natural barriers control development and attract investorsa powerful combination. But some interviewees grow uneasy: The market is artificially inflated; its been too hot for too long. A new provincial sales tax raises costs and temporarily cools demand for midtier housing in some areas outside the core.
Calgary Calgary
15.4
59.0
25.6
Montreal Montreal
31.4
57.1
11.4
Toronto toronto
46.9
44.9
8.2
Vancouver
Vancouver
42.3
0 0% 20 20% 40 40%
42.3
60 60% 80 80%
15.4
100 100%
Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian responses only.
Ottawa. Canadas federal center offers low risk and little upside. Nothing much changes. The government does not downsize, but the Canadian capital will never attract the same lobbying intensity or contractor-related business drawn to Washington, D.C.s much more vast bureaucracy and
62
Exhibit 5-16
Exhibit 5-17
Canadian Industrial/Distribution Property Buy/ Hold/Sell Recommendations by Metropolitan Area

Calgary Calgary
Montreal Montreal
Canadian Hotel Property Buy/Hold/Sell Recommendations by Metropolitan Area

n buy n hold n Sell
25.0% 20.0% 41.9% 41.7% 0% 20%

20
50.0% 46.7% 44.2% 41.7% 40%

40
25.0% 33.3% 14.0% 16.7% 80%

80
n buy n hold n Sell
Calgary
Calgary
4.4%
56.5%
39.1%
Montreal
Montreal
22.2%
44.4%
33.3%
Toronto toronto
Toronto
toronto
32.1%
46.4%
21.4%
Vancouver Vancouver 0
Vancouver
Vancouver 14.3%
0
62.9% 20%
20
22.9% 60%
60
60%
60
100%
100
120
0%
40%
40
80%
80
100%
100
120
Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian responses only.
military/life sciencesrelated enterprises. A new convention center opens next year and could provide a potential market lift, especially for hotels and retail.
to what happened with BP in the gulf. Expect spreading hot growth to resume in coming years; voters rejected a highdensity-development greenbelt modeled after the one in Toronto.
Montreal. Investors tend to short-shrift slow and steady Montreal in comparison with Toronto and Vancouver, but the market holds its own. Its a good value with better yields. Besides mainstay Quebec provincial government offices, the city features a fairly diversified economy, including aerospace and financial services. Edmonton. Edmonton comes off a boil, avoiding the level
of oversupply that deflates Calgary. Oil services businesses thrive because Canada strengthens its position as a leading supplier of oil and gas to U.S. markets. Locals expect positive impacts to filter through the economy, including employment growth.
Halifax. Off the radar screens of the big institutions, Halifax

muddles along in slow growth mode. The Maritime Provinces fail to draw much new population and industry.
Property Types in Perspective

Reflecting modest expectations, property sector ratings improve over last years tepid forecasts, especially for apartments and offices. Retail and industrial hold up, but hotels suffer from reduced U.S. tourist travel. Commercial markets promise to deliver cash flow but not much appreciation, while housing prices could ebb after an unsustainable surge. Most investors take heart in consistent metrics from markets, which linger in reasonable equilibrium; it beats writedowns, defaults, and foreclosures.
Calgary. This market behaves more like a U.S. Sunbelt metro area than the typical Canadian 24-hour city. Sprawl and overbuilding temporarily subdue outlooks, but absorption will come. Developers retreat in the face of high vacancies and show no appetite for new office projects. Locals put faith in robust commodities markets and U.S. consumption of oil from tar sands. We may have a dirty process, but not comparable
Apartments. Owners do not sell, and buyers bid up any

multi-residence deal that comes to marketeven older product. You cant wrestle anything away from all the momand-pop landlords. Immigration fuels high tenant demand, while operators fatten bottom lines with cost controls, and overbuilding is a nonissue. Buying REIT stocks may be the
63
best way to get a piece of this action. Some investors grow concerned about deferred maintenance on aging stock: You need to factor capex into pricing.
Exhibit 5-18
Prospects for Major Commercial/Multifamily

n investment n Development
Apartment
Office. Occupancies trend well over 90 percent in all major

markets except Calgary, where vacancies settle in the relatively manageable low teens. Even the best U.S. markets cannot come close to approaching these healthy supply/ demand fundamentals. Rents generally stay in a narrow range without significant growth drivers. Pension fund owners dont like vacancies, so they willingly make allowances in lease deals. In Canada, office investments behave the way core real estate is advertised, delivering reliable, incomeoriented returns.
Exhibit 5-6 Prospects for Major Commercial/Multifamily Property Types in 2011 Exhibit 5-15
Apartment
ce
Office Retail
Retail
Industrial/Distribution
industrial/Distribution
Hotels
hotels
0
5.90 4.39 5.66 4.12 5.03 3.89 5.00 4.11 4.36 3.00 1 Absymal
1 2 3 4
Retail. Shopping centers lease to capacity: At 2 to 3 percent vacancies, theyre essentially full. Low interest rates encouraged higher-than-normal levels of consumer debt, but most Canadians never caught credit fever and avoid going into hock. After only a mild recession, we have decent consumer confidence and people feel good. Several U.S. department stores consider expanding across the border reinforcing already-strong demand for spacebut find few pad options at potential mall sites. Development activity focuses on small projects in infill areas; urban retail is undersupplied with stores, but land is difficult to find.
5 Fair
9 Excellent
Exhibit 5-19
Prospects for Commercial/Multifamily Subsectors in 2011

n investment n Development Apartment Rental: 5.86 4.50 5.68 4.31 5.37 4.12 5.26 4.10 5.14 4.18 5.09 3.90 4.86 3.41 4.84 3.97 4.71 3.64 4.31 3.15 3.97 2.90 1 Absymal 5 Fair 9 Excellent
Industrial. Until U.S. exports increase, expect only marginal
Apartment Rental: Moderate Income Moderate income
improvement in warehouse rents and occupancies, which CentralCentralOCity Office City ce begin to stabilize after a slump. Owners work hard to fill Apartment Rental: Apartment empty space, but most are not overleveraged and can per- Rental: High Income high income severe through the turbulence. Seemingly insatiable investor Neigh./Community Neigh./Community Shopping Ctrs. Shopping Ctrs. demand appears unaffected by market softness. If owners Warehouse industrial get in trouble, they have ready exits. In Ontario, some ware- Warehouse Industrial house markets outside of Greater Toronto face greater chalPower Power Centers Centers lenges, particularly Windsor.
Regional Malls Regional Malls R&D industrial R&D Industrial Suburban Office Suburban O ce
Hotels. Lodging-sector fundamentals show signs of life, but

need a bigger lift from American visitors, who stay closer to home. Some borrowers cry uncle and bail, giving cash investors a rare opportunity for bottom feeding.
Housing. Interviewees expect house prices to level off

and soften, possibly slipping 5 to 10 percent, after a solid run. Rising interest rates and higher sales taxes in Ontario and British Columbia douse buyer fervor. The market had taken advantage of free money; now its time to back off. Overseas purchasers buoy Toronto and Vancouver condo markets.
Limited-Service hotels Limited-Service Hotels
Full-Service Hotels
Full-Service hotels
FAKE 1 FAKE 2
64
10
Exhibit 5-20
Prospects for Residential Property Types in 2011

n investment Prospects n Development Prospects
Exhibit 5-21
Prospects for Niche and Multiuse Property Types in 2011

n investment Prospects n Development Prospects
In ll infill and intown housing and Intown Housing

Senior Elderly housing Senior Elderly Housing Multifamily Condominiums Multifamily Condominiums Attached Single-Family Attached Single-Family Moderate income
6.00 6.23 5.28 5.04 5.04 5.23 5.04 5.12 4.75 4.89 4.61 4.65 4.57 4.72 3.95 3.91 3.91 3.96 3.52 3.04 2.86 2.41
Infrastructure Urban Mixed-Use Properties
infrastructure
6.04 6.04 6.04 5.92 5.22 5.05 4.86 4.40 4.59 4.29 4.40 4.00 4.17 3.96 4.04 3.57 3.09 2.82 3.00 2.50
Urban Mixed-Use Properties Mixed-Use town Centers
Mixed-Use Town Centers Medical O ce Self-Storage Facilities
Detached Single-Family: ached Single-Family: Moderate Income Detached Single-Family: Detached Single-Family: High Income
Medical Office
Self-Storage Facilities
high income
Affordable housing A ordable Housing Manufactured home Manufactured Home Communities Student housing Student Housing Second Leisure Homes Second andand Leisure homes Communities
Data Centers Master-Planned Communities Lifestyle/Entertainment Retail
Data Centers
Master-Planned Communities Lifestyle/Entertainment Retail Master-Planned Resorts
Golf Course Communities
Golf Course Communities
Master-Planned Resorts Resort Hotels

8 109 Excellent
Resort hotels 1 5 Fair
1 2 Absymal
5 6 Fair
FAKE 1
Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadian FAKE1 respondents only.
0Absymal 2
8Excellent10
FAKE 9 Source: Emerging Trends in Real Estate 2011 survey.

Note: based on Canadian respondents only.
Best Bets
n Winnow portfolios of select low-yielding assets and reinvest opportunistically in a U.S. market recovery. n Time investments to the market and buy down-but-not-out center city hotels. n Ditto on struggling industrial properties in the Greater Toronto area. n Buy apartments if you can find anything available. They offer the best security. n Look for underperforming infill retail or commercial space, and position for redevelopment as condos. Canadian cities will continue to grow vertically as planners seek to encourage 24-hour environments. n Husband land sites inside the Toronto greenbelt for future residential development; demand and pricing should continue to increase.
FAKE2
Exhibit 5-22
Canada: Downtown Office VacancyClass A Space

20 20%
Vancouver Calgary toronto Montreal
Montr
15 15%
Vacancy Rates (%)
Toront
Calgar 10 10%
Exhibit 5-12 Exhibit 5-21
Vanco
Canada: Down
5 5%
2001
2002
2003
2004
2005
2006
2007
2008
1Q09
2Q09
3Q09
2Q10
Vacancy Rates Year Vancouver 2001 6.1% 10.1% 2002 13.3% 11.3% 2003 12.3% 9.6% 2004 7.4% 6.0% 2005 6.3% 0.8% 2006 3.4% 0.0% 2007 3.9% 2.4% 2008 2.1% 3.1% 1Q09 3.1% 3.7% 2Q09 3.3% 6.2% 3Q09 4.8% 9.5% 2Q10 5.6% 15.7% Source: CB Richard El
Source: Cb Richard Ellis.
65
Exhibit 5-23
Canadian Central City Office

2011 investment Prospects Development Prospects Prospects Good Modestly Poor Rating 7.26 4.31 6.4% Sell 11.6% Ranking 1st 2nd
Exhibit 5-26
Canadian Neighborhood/Community Centers

2011 investment Prospects Development Prospects Prospects Fair Modestly Poor Rating 5.26 4.10 6.9% Sell 18.4% Ranking 4th 5th
Sell Expected Capitalization Rate, December 2011 Hold
Sel
Buy Buy
34.2%
Hold 47.4%
Ho
Buy
Exhibit 5-26 Canadian Central City Oce Exhibit 5-20 Source: Emerging Trends in Real
Estate 2011 survey. Note: based on Canadian respondents only.
Exhibit 5-28 Neighborhood Centers Exhibit 5-22
Exhibit 5-24
Canadian ApartmentsModerate Income

2011 investment Prospects Development Prospects Prospects Modestly Good Fair Rating 5.86 4.50 6.1% Hold 35.9% Sell 5.1% Ranking 2nd 1st
Exhibit 5-27
Canadian Warehouse Industrial

2011 investment Prospects Development Prospects
Sell
Prospects Fair Modestly Poor
Rating 5.14 4.18 7.6%
Ranking 5th 3rd

Sel
Hold Buy
Exhibit 5-24 Canadian ApartmentsModerate Income Exhibit 5-19
Ho
Sell 14.6%
Bu
Exhibit 5-31 Warehouse In Exhibit 5-23
Exhibit 5-25
Exhibit 5-28
Canadian ApartmentsHigh Income

2011 investment Prospects Development Prospects Prospects Fair Modestly Poor Rating 5.37 4.12 5.7% Sell 12.8% Ranking 3rd 4th
Canadian Power Centers

Sell Expected Capitalization Rate, December 2011 Hold
Buy Buy
Exhibit 5-25 Canadian ApartmentsHigh Income Exhibit 5-19
23.7%
Hold 63.2%
E d E
66
Exhibit 5-29
Canadian Regional Malls

2011 investment Prospects Development Prospects Prospects Fair Poor Rating 4.86 3.41 6.9% Sell 2.6% Ranking 7th 9th
Exhibit 5-32
Canadian HotelsLimited Service

2011 investment Prospects Development Prospects Prospects Modestly Poor Poor Rating 4.31 3.15 9.0% Sell 24.2% Ranking 10th 10th
Sell Hold Buy
Sell Expected Capitalization Rate, December 2011 Hold Buy Buy Exhibit 5-30 Canadian 12.1%
Regional Malls Exhibit 5-22
Hold 63.6%
Exhibit 5-33 Canad HotelsLimited Serv Exhibit 5-24
Source: Emerging Trends in Real Estate 2011 survey. Note: based on Canadia respondents only.
Exhibit 5-30
Exhibit 5-33
Canadian R&D Industrial

Canadian HotelsFull Service

2011 investment Prospects Development Prospects Prospects Modestly Poor Poor Rating 3.97 2.90 8.7% Sell 26.5% Ranking 11th 11th
Sell Hold Buy
Expected Capitalization Rate, December 2011 Sell

Hold Buy Buy
Exhibit 5-32 8.8% Canadian R&D Industrial Exhibit 5-23
Hold 64.7%
Exhibit 5-34 Canad HotelsFull Service Exhibit 5-24
Exhibit 5-31
Canadian Suburban Office

Sell Hold
Buy
Exhibit 5-27 Canadian Suburban Oce Exhibit 5-20
67
68
c h a p t e r
Latin America
potential in two primary emerging markets, but various hurdles limit opportunities.
Offshore investors see plenty of
here the United States has gone boom-bust and Canada offers only modest growth, Latin Americas story centers on the enormous potential of two emerging marketsBrazil and Mexico. Together they account for two-thirds of the regions population and most of its growth dynamics. But amid the swirl of young populations, an energized middle class, and the immense promise of expanding industries, investors deal with inevitable corruption and lack of transparency, the need to sort out the reliability of local partners, andin the case of Mexicothe scourge of drug violence. Enticements and obstacles leave most North Americans intrigued by the possibilities, but not straying off home turf. In the United States, particularly, con-
Emerging Trends in
tending with difficult domestic issues distracts from considering emerging market investments. But for those who do, the action is all about two countries: They take the oxygen away from all other Latin American markets.
Brazil: Opportunities and Limits

Emerging Trends interviewees express few doubts: The boom period has legs, the cat is out of the bag, people want to be where the action is, and thats Brazil. The country is selfsufficient in agriculture and energy, and expands its high-tech manufacturing. More offshore institutions get their feet wet, but find limited opportunities in existing real estate because only a handful of buildings meet investment grade. Then they confront hurdles from Brazils transaction culture of group ownership, which makes deal making difficult. Its hard to get all parties to sell. Development may be where the real action lies. Theres a ton of demand for a ton of new space. You can build housing forever, and people will want it. Plus, shopping centers are few and far between, and distribution warehouse facilities are in short supply to serve growing consumer appetites. The middle class is huge and dramatically increasing; populations concentrate in urban areas, creating intense demand for highrise residential and retail. Again, local companies with big development platforms and insider connections have a tremendous advantage and try to maintain a stranglehold; outsiders cant compete and must make alliances. Brave investors enter secondary markets to develop malls, and strip centers will follow next.
Exhibit 6-1
Latin America General Indicators

Unemployment (%) Argentina brazil Chile Colombia Ecuador Mexico Peru Uruguay Venezuela 8.8 6.8 9.1 13.5 8.3 5.2 8.8 7.4 6.6 Inflation (%) 10.1 5.1 2.0 3.5 4.0 4.6 1.5 6.2 29.7
Source: international Monetary Fund, World Economic Outlook database, April 2010; Moodys Economy.com.
69
Exhibit 6-2
Latin America Economic Growth

Percentage Real GDP Growth 2007 Chile Peru Mexico brazil Colombia Uruguay Argentina Ecuador Venezuela 4.7 8.9 3.3 5.7 7.5 7.6 8.7 2.5 8.4 2008 2009* 2010* 2011* 2012* 2013* 3.7 9.8 1.5 5.1 2.4 8.5 6.8 7.2 4.8 -1.5 0.9 -6.5 -0.2 0.1 2.9 0.9 0.4 -3.3 4.7 6.3 4.2 5.5 2.3 5.7 3.5 2.5 -2.6 6.0 6.0 4.5 4.1 4.0 3.9 3.0 2.3 0.4 4.8 5.7 5.2 4.1 5.0 3.9 3.0 2.0 0.5 4.6 5.7 4.9 4.1 5.0 3.9 3.0 2.0 1.6
Exhibit 6-3
Brazil: Foreign Direct Real Estate Investment

Exhibit 6-3 Brazil: Foreign Direct Real Estate Investment
3500 3,500 3000 3,000 2500 2,500
US$ (Millions)
2000 2,000 1500 1,500 1000 1,000 500 500 0 0
Source: international Monetary Fund, World Economic Outlook database, April 2010. * Projections.
2002 2003 2004 2005 2006 2007 2008 2009 2010*
Sources: Central bank of brazil, Capright Property Advisers LLC.
For office markets, investors find an extremely limited menu in only two citiesRio de Janeiro and Sao Paulo. Everyone wants to be in Rio. The relatively small business district has virtually zero percent vacancy, and rents skyrocketed 30 percent in the last year. The mountains-risingfrom-ocean landscape leaves no place to build, while the coming Olympics and World Cup fuel interest. Similarly, Sao Paulos office sector remains tight, escalating rents and values. Its a bubble driven by user demand, not speculators. Poor infrastructure limits new development opportunities. The citys roads and mass transit cannot handle population growth; 800 new cars each day add to already congested streets. Interviewees expect yields to squeeze down, and markets to cool off but remain enticing. Five years ago, investors expected IRRs [internal rates of return] of 40 percent. Now thats dropped into the high teens, and core funds are next.
* Projection.
Mexico: Potential and Concerns

Mexico offers obvious positivesa hard-working population, an expanding middle class, and the resulting increased demand for homes and consumer goods. But everybody reads about mind-blowing drug wars, police corruption, and political assassinations. In addition, real estate markets hit the skids when the U.S. economy tanked. Prices declined 30 to 35 percent and now recovermore than halfway backbut its been tough sledding.
Finally, banks relax lending curbs after a huge liquidity crunch brought on by the worldwide credit crisis. Mexican investors did not overborrow: patient equity players take a patrimonial view and count on long-term returns, relying on healthy demographics and controlled development. In fact, most cities and property sectors have avoided overbuilding. Boosters suggest that markets now align for significant growth from pent-up demand, and highlight opportunities to fill the remaining capital gap. Theres a large hole to fill, especially for construction loans. New laws allow domestic pension funds to invest in real estate and infrastructure, which could increase property market liquidity and demand for product. Were seeing the checkbook at the end of the tunnel. But many jobs depend on the U.S. economymanufacturing of time-sensitive products or heavy machinery that cannot be shipped by boat from Asia, hotel- and tourismrelated businesses, and call centers. Locals necessarily raise concerns about when and whether the United States will emerge from its doldrums. Industrial real estate should improve during 2011 after a no-demand, no-development period. The U.S. downturn cuts two ways: overall declines in manufacturing and distribution activity, especially from hardest-hit northern border states, have been offset somewhat by more U.S. manufacturer relocations due to the weakened peso. Interior warehouse markets, serving Mexico City, suffered less. Retail makes a good long-term play, betting on the growing middle class. Office markets show decent recovery and low vacancies in Mexico
70
Chapter 6: Latin America
City, but offer negligible investment opportunities because mostly domestic owners do not sell. Lenders require tenants in place for financing new construction, so speculative development wont happen. Most multifamily housing is owner occupied and heavily government subsidized. Developers receive a guaranteed return over ten-year periods without much upside. For-sale housing remains supply constrained by lack of construction financing, while the second-home market went off the cliff when U.S. retiree demand evaporated. Canadians fill some of the void, gaining buying power from their stronger dollar and the weaker peso. In favored coastal Baja and resort markets, cheap land could be a bargain. The second-home market will come back.
Locals lament too much distraction from drug issues, which torpedo revenues for some resort hotels already feeling the effects of U.S recession. We need to deal with perceptions; its our biggest hurdle to overcome. Other interviewees admit to grim security concerns, particularly in northern cities like Tijuana, Jurez, and Monterrey. Business goes on, but not many relocations. Government planners encourage future development to focus on more urban concepts and city centers, getting away from expanding suburban envelopes. The road-dependent sprawl model, copied from the United States, reaches the point of diminishing returns, creating hardships for many Mexicans who cannot afford cars or cannot support multicar households. Serious congestion and pollution, especially around Mexico City, must be addressed, too.
71
Interviewees
Abacus Capital Group LLC Kyle Ellis benjamin L. Friedman Ackman-Ziff Real Estate Group LLC Gerald Cohen Patrick hanlon Simon Ziff AEW Capital Management Marc Davidson Allied Properties REIT Michael Emory The Alterra Group of Companies Robert h. Cooper AM Connell Associates LLC Alice Connell AMB Property Corporation Guy Jaquier hamid R. Moghadam APG Asset Management US Inc. Steven hason Apollo Global Management Joseph F. Azrack ARA Finance thomas MacManus The Arden Group Craig A. Spencer AREA Property Partners Steve Wolf Arnon Corporation Gillie Vered Artemis Advisors, LLC Dale Anne Reiss Aspac Developments Ltd. Gary Wong Associated Estates Realty Corporation Lou Fatica AvalonBay Communities, Inc. bryce blair Avison Young bill Argeropoulos J. Richard Chilcott Aviva Capital Management Edward M. Casal AXA Equitable timothy Welch Ayer Capital V. Raja Babcock & Brown Residential Philip Payne Bank of America Merrill Lynch Jeffrey D. horowitz Ron D. Sturzenegger Barcelo Crestline bruce Wardinski Barclays Capital P. Sheridan Schechner Ross Smotrich Beacon Capital Partners, LLC Sara Shank Benchmark Assisted Living, LLC Stephanie handelson Benenson Capital Partners Richard Kessler Bentall L.P. Gary Whitelaw Berkshire David Olney David Quade Berkshire Property Advisors LLC Larry Ellman BlackHawk Real Estate LLC Jamie Conoposk Boston Properties Mike Labelle Mike Walsh BPG Properties, Ltd. Arthur P. Pasquarella Brandywine Realty Trust Gerard h. Sweeney Brookfield Office Properties Dennis Friedrich Building Industry and Land Development Association Stephen Dupuis Buzz McCoy Associates, Inc. bowen h. buzz McCoy Calloway Real Estate Investment Trust Simon Nyilassy Camden Property Trust Richard J. Campo Campus Apartments James A. Smith iii Camrost-Felcorp David Feldman Canadian Apartment Properties Real Estate Investment Trust thomas Schwartz Capright Property Advisors LLC Jay Marling Selina McUmber Carr Properties Weston Andress Carttera Private Equities Inc. t. James tadeson CBRE Econometric Advisors Jon Southard CB Richard Ellis Ltd. John Obryan Raymond Wong William C. Yowell iii Champion Partners Jeff Swope CitcoReal Estate Investment Fund (REIF) Services Michael Peterson City Ventures tony Pauker The Clarett Group Veronica W. hackett Claridge Homes bill Malhotra Neil Malhotra CNL Financial Group Inc. thomas K. Sittema Colliers International Ross Moore Colony Capital, LLC Richard b. Saltzman Condor Properties Ltd. Continental Development Corporation Alex Rose Cornerstone Real Estate Advisers LLC Jim Clayton David J. Reilly Credit Suisse Joshua blaine boriana Karastoyanova CRE Finance Council Dorothy Cunningham Crosland, LLC todd W. Mansfield Crown Realty Partners Michael Pittana Cushman & Wakefield James Carpenter bruce Ficke Maria t. Sicola Cushman & Wakefield Sonnenblick-Goldman Steven Kohn Developers Diversified Realty Corporation David J. Oakes DiamondRock Hospitality Company Mark brugger Dorsay Development Corporation Geoffrey Grayhurst DRA Advisors, LLC Gabe Levin Paul McEvoy, Jr. Dundee Real Estate Investment Trust and Dundee Realty Corporation Michael Cooper Dune Capital Cornelia buckley Emigrant Bank Patricia Goldstein Empire Communities Paul Golini, Jr. Andrew Guizzetti Daniel Guizzetti Equibase Capital Group Michael husman Equity Group Investments, LLC Sam Zell EVS Realty Advisors, Inc. John Reis Firm Capital Corporation Eli Dadouch First Capital Realty Inc. Dori Segal Forest City Commercial Group James Ratner Forum Partners David Karp GE Real Estate thomas Curtin Michael Jordan Ronald Pressman GLL Partners Dietmar Georg Graywood Development Ltd. Great Point Investors Joseph Versaggi GreenOak Real Estate Advisors Sonny Kalsi Greenpark Group of Companies Carlo baldassarra Grosvenor Investment Management US, Inc. Douglas S. Callantine Grubb & Ellis Robert bach Guggenheim Real Estate Joe Mahoney H/2 Capital Partners Spencer haber Harbor Group International Richard Litton Lane Shea Hawkeye Partners L.P. bret R. Wilkerson Heitman Richard Kateley High Street Equity Advisors bob Chargares HIGroup, LLC Douglas Cameron Hilton Worldwide Christopher J. Nassetta Hines Ken hubbard HOOPP Michael Catford Hopewell Development Corporation Lesley Conway Kevin Pshebniski Houlihan Lokey Jonathan G. Geanakos Humphreys Real Estate Investments Kirk humphreys Hyde Street Holdings, LLC Patricia R. healy ING Clarion Partners Chuck Lathem Institutional Real Estate, Inc. Geoffrey Dohrmann International Council of Shopping Centers Mike Kercheval I-Star Financial George Puskar John Buck Company Charlie beaver Steven Shiltz Kent A. Swanson
72
JP Morgan Asset Management Jean M. Anderson Mark bonapace Sheryl M. Crosland Kevin Faxon Mike P. Kelly Michael Obrien Anne S. Pfeiffer Elizabeth t. Propp Frederick N. Sheppard James M. Walsh Kennedy Associates Real Estate Counsel Douglas Poutasse Preston Sargent Kimco Realty Corporation Michael V. Pappagallo KingSett Capital Inc. Jon Love Korpacz Realty Advisors Peter Korpacz KTR Capital Partners Robert Savage Lachman Associates Leanne Lachman LaSalle Investment Management Lynn thurber LEM Mezzanine LLP herb Miller Liberty Property Trust Michael t. hagan Lubert-Adler Partners David Solis Cohen Macquarie Capital Inc. Simon breedon Macquarie Capital Funds, Inc. Mark Mullen Madison Homes Miguel Singer Madison International Realty Ronald M. Dickerman Manulife Financial Constantino tino Argimon David Shaw Joseph D. Shaw ted Willcocks Mattamy Homes Peter E. Gilgan Melcor Developments Ltd. Ralph b. Young Menkes Developments Ltd. Peter Menkes
Mesirow Financial Chris helmetag Greg Karczewski Metrus Properties Robert DeGasperis Metzler Realty Advisors, Inc. Donald Wise Midway Companies brad Freels Monday Properties Anthony Westreich Moodys Investors Service Merrie Frankel Moran and Company Mary Ann King Morgan Properties Mitchell L. Morgan Mount Kellett Capital Management L.P. Kevin Naughton National Association of Real Estate Investment Managers Stephen M. Renna National Association of Real Estate Investment Trusts Steven A. Wechsler New Boston Fund, Inc. Mike Doherty tim Medlock Jim Rappaport Kirk Sykes David Willett New Tower Trust Patrick O. Mayberry Northwestern Mutual Life Insurance Co. David D. Clark OConnor Capital Partners thomas Quinn Joseph M. Zuber Otra Capital Ross brennan Oxford Properties Group blake hutcheson Pennsylvania Real Estate Investment Trust Daniel G. Donley Jeffrey A. Linn Joshua G. Schrier PM Realty Group John S. Dailey PNC Real Estate Finance William G. Lashbrook
Portfolio Advisors harry Pierandri Praedium Group LLC Russell L. Appel Principal Real Estate Investors Michael J. Lara Andrew Warren Prudential Real Estate Investors J. Allen Smith PSP Investments Neil Cunningham Pyramid Advisors Chris Devine Rick Kelleher Jack Levy Quadrant Real Estate Advisors thomas Mattinson RBC Capital Markets Carolyn blair Daniel Giaquinto Douglas McGregor The Real Estate Roundtable Jeffrey Deboer RealNet Canada George Carras Real Property Association of Canada Michael brooks Regency Centers Corporation Martin E. Stein, Jr. Regent Partners David Allman RioCan Real Estate Investment Trust Edward Sonshine Frederic Waks Rockwood Capital Arne Arnesen Rockwood Mexico blanca Rodriguez Rosen Consulting Group Kenneth Rosen Rothschild Realty D. Pike Aloian RREEF Scott Koenig Charles b. Leitner Kurt W. Roeloffs RXR Realty LLC Frank Patafio
Savills, LLC Allison bradshaw Jeffrey Cooper John D. Lyons Gerard Mason Arthur Milston R. John Wilcox Sentinel Real Estate Corporation David Weiner Seven Hills Properties Luis A. belmonte Shenkman Corporation Kevin E. McCrann SL Green Realty Corporation isaac Zion Softec Gene towle Sonnenblick-Eichner Company David Sonnenblick The Sorbara Group Edward Sorbara Joseph Sorbara Square Mile Capital Management LLC Jeffrey Citrin Craig Solomon Stag Capital Partners ben butcher Starwood Capital Group Jeffrey Dishner Jerry Silvey Taggart Realty Management Jeff Parkes Michelle taggart Paul taggart Thompson National Properties LLC Anthony thompson Timbercreek Asset Management Ugo bizzari Trademark Property Company terry R. Montesi TRECAP Partners Robert Fabiszewski Michael McNamara Douglas tibbetts Tricon Capital Group Inc. David berman Gary berman TriLyn LLC Mark Antoncic TriMont Real Estate Advisors brian Pittard Greg Winchester
Trinity Capital Advisors Sean J. McKinley Trinity Real Estate Richard Leider UBS Global Asset Management (Americas) Inc. Lee S. Saltzman UBS Realty Investors LLC Matthew Lynch University of Denver, Dividend Capital Group Glenn Mueller Urban America tom Kennedy USAA Real Estate Company t. Patrick Duncan U-Store-It Trust Christopher P. Marr Valtus Capital Group John Gilchrist Michael Jabara Viney Singal Vantage Real Estate Partners Ryan Gilbert Verde Realty Jeannette Rice Virginia Retirement System Field Griffith Vornado Realty Trust Michael D. Fascitelli Walker & Dunlop Kieran Quinn Washington Real Estate Investment Trust thomas Regnell Weingarten Realty Gary Greenberg Wells Fargo Charles h. Chip Fedalen, Jr. Wells Real Estate Funds Don henry Welsh Capital, LLC Peter C. Austin Westbank Projects Corp. Judy Leung Westbrook Partners Sush torgalkar Westfield Capital Partners Ray DArdenne Wright Runstad & Company Gregory K. Johnson
73
Sponsoring Organizations
PricewaterhouseCoopers real estate practice assists real estate investment advisers, real estate investment trusts, public and private real estate investors, corporations, and real estate management funds in developing real estate strategies; evaluating acquisitions and dispositions; and appraising and valuing real estate. Its global network of dedicated real estate professionals enables it to assemble for its clients the most qualified and appropriate team of specialists in the areas of capital markets, systems analysis and implementation, research, accounting, and tax. The mission of the Urban Land Institute is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. ULI is committed to n Bringing together leaders from across the fields of real estate and land use policy to exchange best practices and serve community needs; n Fostering collaboration within and beyond ULIs membership through mentoring, dialogue, and problem solving; n Exploring issues of urbanization, conservation, regeneration, land use, capital formation, and sustainable development; n Advancing land use policies and design practices that respect the uniqueness of both built and natural environments; n Sharing knowledge through education, applied research, publishing, and electronic media; and n Sustaining a diverse global network of local practice and advisory efforts that address current and future challenges. Established in 1936, the Institute today has nearly 30,000 members worldwide, representing the entire spectrum of the land use and development disciplines. ULI relies heavily on the experience of its members. It is through member involvement and information resources that ULI has been able to set standards of excellence in development practice. The Institute has long been recognized as one of the worlds most respected and widely quoted sources of objective information on urban planning, growth, and development. Patrick L. Phillips Chief Executive Officer, Urban Land Institute
Global Real Estate Leadership Team

Barry Benjamin Global Asset Management Leader Luxembourg, Luxembourg Kees Hage Global Real Estate Leader Luxembourg, Luxembourg Uwe Stoschek Global Real Estate Tax Leader Berlin, Germany Timothy Conlon United States Real Estate Leader New York, New York, U.S.A. Paul Ryan United States Real Estate Tax Leader New York, New York, U.S.A. Mitchell M. Roschelle United States Real Estate Business Advisory Services Leader New York, New York, U.S.A. K.K. So Asia Pacific Real Estate Tax Leader Hong Kong, China John Forbes European, Middle East & Africa Real Estate Leader London, England, United Kingdom
Urban Land Institute 1025 Thomas Jefferson Street, NW Suite 500 West Washington, DC 20007 202-624-7000 www.uli.org
www.pwc.com
74

What are the best bets for real estate investment and development in 2011? Based on personal interviews with and surveys from more than 800 of the most influential leaders in the real estate industry, this forecast will give you the heads-up on where to invest, what sectors offer the best prospects, and trends in capital flows that will affect real estate. A joint undertaking of PricewaterhouseCoopers and the Urban Land Institute, this 32nd edition of Emerging Trends is the forecast you can count on for no-nonsense, expert insight.
Highlights
n Tells you what to expect and where the best opportu-
nities are.
n Elaborates on trends in the capital markets, including
sources and flows of equity and debt capital. and which ones to avoid. specialty property types.
n Indicates which property sectors offer opportunities
n Provides rankings and assessments of a variety of
n Reports how the economy and concerns about credit
issues are affecting real estate. and least potential. on real estate.
n Discusses which metropolitan areas offer the most
n Describes the impact of social and political trends
n Explains how locational preferences are changing.
ULI Order Number: E41 ISBN is 978-0-87420-149-9

I S B N 978-0-87420-149-9
90000
780874 201499
www.uli.org
www.pwc.com

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2011

Trends in Real Estate

Emerging Trends in Real Estate 2011

Trends in Real Estate

Editorial Leadership Team

Emerging Trends in Real Estate 2011

Emerging Trends in Real Estate 2011

Entering the Era of Less

NCREIF Capitalization Rates vs. S&P 500 Inverse P/E Ratio

Sources: NCREIF, S&P, PricewaterhouseCoopers LLP.

Emerging Trends in Real Estate 2011

NCREIF Cap Rates vs. U.S. Ten-Year Treasury Yields

Chapter 1: Entering the Era of Less

U.S. Real Estate Returns and Economic Growth

40% 30% 20% 10% 0% 10% 20% 30% 40%

No Way Out. In the meantime, compromised borrowers survive

Muddling Along at Bottom

Emerging Trends Barometer 2011

Emerging Trends in Real Estate 2011

Already Overpaying? Emerging Trends interviewees

Index Returns: Real Estate vs. Stocks/Bonds

40% 30% 20% 10% 0% 10% 20% 30% 40%

Emerging Trends in Real Estate 2011

Chapter 1: Entering the Era of Less

Real Estate Business Prospects in 2011

Demand Drag: The Compromised Economy

Emerging Trends in Real Estate 2011

Social/Political Issues Social/Political Issues

3.02 2.88 2.88 2.61 2.33

Threat of terrorism Immigration Threat of terrorism

Social equity/inequality War issues Social equity/inequality

Climate change/global warming

Emerging Trends in Real Estate 2011

Chapter 1: Entering the Era of Less

Inflation versus Deflation and Higher Interest Rates

Inflation and Interest Rate Changes

Next Five Years

Short-Term Rates (One-Year Treasuries

Commercial Mortgage Rates

Exhibit 1-3 In ation and Interest Rate Changes Exhibit 1-4

Long-Term Rates (Ten-Year Treasuries)

Emerging Trends in Real Estate 2011

Function over Form. For the future, office developers may

Bubble Threat. A leading real estate economist raises a

Regulation and Taxes

Supply Side: Development Stall-Out

Emerging Trends in Real Estate 2011

Chapter 1: Entering the Era of Less

Firm Profitability Forecast 2011

Profitability in 2011 by Percentage of Respondents

Abysmal 0.8% Poor 6.3%

Real Estate Industry: Chastened and Smaller

Higher Profits. All the reconfiguring should help improve

Emerging Trends in Real Estate 2011

Best Bets 2011

Remember: Patience Is a Virtue. Transaction activity

Emerging Trends in Real Estate 2011

Chapter 1: Entering the Era of Less